The first half of this year has been good for Latvia’s 2nd tier pension active investment plans – in line with the events in the financial market, those plans that invest more in shares have performed better.
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However, the results of pension plans need to be assessed in the long term, and from almost a twenty-year perspective, we can see how interest rates turn into real money.
The state funded pension scheme was introduced in 2001 and the funds were managed for the first two years Treasury, but since 2003 it has been managed by private fund managers. In the first years of operation of tier 2 pensions, the amount of assets in investment plans was relatively small. For instance, “SEB active plan “assets were approximately EUR 9 million at 31 January 2005 and approximately EUR 29 million at 31 January 2007; today they amount to almost EUR 559 million *. Calculate for yourself the 3%, 5% or 10% return At the moment, when the total amount of assets has increased significantly, we are seeing more and more figures in the growth of customer savings.
Investing in stocks increases profitability
For more than three years – since 2018 – 2nd tier pension participants have the opportunity to make savings in pension plans with a maximum share of up to 75%. Until 2007, the law allowed only up to 30% of pension plan assets to be invested in shares, but for the next 10 years plan managers were allowed to invest up to 50% of total assets in shares. The possibility to invest a larger part of the savings in shares has also allowed to increase the amount of customer savings. This is well reflected in the profitability indicators of these investment plans – looking at the results on the portal manapensija.lv, we can see that the flagships of profitability since 2018 are the most active investment plans.
This year, tier 2 members will also have access to investment plans that can invest up to 100% of their assets in equities, making it possible to aim for higher returns in the long term, which of course goes hand in hand with higher risk.
The contribution rate must remain stable
The contribution rate or the amount that is diverted from both the employer’s and the employee’s social insurance contributions to the 2nd level of pensions has also played an important role in the long-term results. Currently, the amount of contributions is 6% of gross salary, and this has been the case since 2016. If we look at it historically, it should be noted that this rate has changed several times (from 2% to 8%), but during the lion’s court period – 8 years – it was only 2%. Thus, if currently 60 euros (720 euros per year) are automatically transferred from the 1000 euro salary savings to the 2nd level of pensions, then at the three times the lowest 2% rate they would be only 20 euros (240 euros per year).
Looking to the future, I am in a positive mood – currently the environment in which managers are allowed to work is very favorable for all participants in the 2nd pillar of pensions. First, the plan assets are large enough to be successfully invested; secondly, the contribution rate has been stable for 5 years and, thirdly, we can finally create 100% share plans.
* Data from the portal “www.manapensija.lv”.
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