The Ministry of Welfare (MOW) has explained that this will enable the reduction of labor taxes and possibly contribute to the overall amount of future old-age pensions.
The ministry states that the income in old age is made up of the old-age pension, which consists of the pension capital accumulated both in the first level of pensions and in the second level of pensions. Taking into account that when introducing the State Funded Pension Scheme (VFPS), the contribution rate to the VFPS was redistributed from the rate of the first level of pensions, reducing it accordingly, instead of introducing an additional rate, the part of the funded pension is significant for the old-age pension.
In situations where there are significant fluctuations in the financial markets, the value of the capital accumulated in the second level of pensions falls, but the recovery of the capital market is quite slow, the ministry claims.
The annotation of the law emphasizes that it is especially important for people that their accumulated pension capital does not decrease, so that the income at retirement is as high as possible. In 2023, 18,418 VFPS members stopped participating in the second level of pensions in connection with claiming the state old-age pension. The average length of membership of these persons in the Social Insurance Fund was 17.3 years, and during the membership, an average of EUR 5,156.27 was paid per member, the accumulated pension capital being an average of EUR 5,360.75. Thus, the pension capital increased by 4% during the whole period of VFPS membership.
Both inflation and fluctuations in the financial markets have significantly affected the profitability of pension plans, and not only the riskier investments in the stock markets, but also the conservative investments in bonds, explains LM. This allows the LM to conclude that the profitability of pension plans is low.
By moving back one percentage point to the first level of pensions, future pension contributions will be smaller in the second level of pensions, but higher in the first level, which will increase the pension capital in the first level of pensions, i.e. in the state unfunded pension scheme, by investing in it one percentage point more or 15% compared to the previous 14% instead of LM emphasizes that the pension capital at the first level of pensions is updated in accordance with the Law “On State Pensions”. If the wage index of insurance contributions is less than “1”, the pension capital, unlike the second level of pensions, is never reduced.
The Saeima’s decision to reduce the contribution pension at the second level drew sharp criticism from financial and economic experts, banks, investment management companies, the Bank of Latvia and the Financial Industry Association.
For example, the former president of the Bank of Latvia, Mārtiņš Kazāks, stated in an interview with the LETA agency that the proposed solution to reduce contributions to the second level of the pension, shifting the contribution rate by one percentage point to the first level of the pension, is not optimal for society in the long term.
“If in the future, for some reason, the currently proposed postponement of one percentage point back to the second level of pensions is delayed, then it may cause sustainability problems of the pension system,” Kazaks emphasized. He noted that initially it was supposed that 10% of the social contribution rate was diverted to the second level of pensions, but now 6% is diverted.
“Initially, a larger share in the first level of pensions is adequate, but over time, especially seeing that the number of workers is decreasing due to demographics, the demographic load is increasing, the largest share of earning capacity is in the second level of pensions, but the return from the first level of pensions will become less and less,” said Kazaks .
He also pointed out another conceptual problem – by transferring more emphasis to the first level of pensions, the pension system becomes more exposed to the political process and risks, it increasingly becomes an annual budget issue.
On the other hand, the Chairman of the Board of the Financial Industry Association, Uldis Cērps, stated in an interview with the LETA agency that the reduction of contributions to the second-level pension funds does not promote confidence in either the stability of taxes or the pension system.
Cerps noted that the argument that the objections to the reduction of contributions for a certain period in the second pension level are only related to the profit motives of banks and asset managers does not really stand up to criticism, because the income of asset managers from this very specific business, for which the clients are actually supplied by the state, is regulated with the regulations of the Bank of Latvia.
“The state has limited this income, and it is an extremely regulated business. Therefore, I don’t really see the basis of this argument. The real problem with the reduction of deductions is that frequent changes in the pension system are not good for people or for the stability of the pension system,” said Cērps.
Kārlis Purgailis, the chairman of the board of the subsidiary company “CBL Asset Management” of the bank “Citadele” and the bank’s chief economist, emphasized that in the long term, the second level of pension contributions should be increased – contrary to the currently planned reduction.
The social contributions diverted to the second-level pension savings should reach 10% of the employee’s gross salary, emphasized Purgailis, pointing out that by transferring residents to plans corresponding to their age and increasing contributions to the second-level pension, the residents’ old-age savings would become significantly larger in the long term.
Iļja Arefjevs, chairman of the board of the investment management company “Vairo”, admitted that the decision to transfer the pension contribution rate by one percentage point from the state-funded pensions, i.e. the second level of pensions to the first level of pensions, shows a banal lack of funds at the first level of pensions.
Arefievs pointed out that, not in such a dramatic form, but the scenario that was implemented during the financial crisis in 2009, when the rate of contributions to the second level of pensions was reduced from 8% to 2%, is being repeated. At that time, the transfer of funds to the first level of pensions was necessary because there was high unemployment, social insurance contributions decreased and there was a lack of funds to pay existing pensioners from the first level of pensions.
“However, currently, in contrast to the financial crisis and the post-crisis period, we have very low unemployment, and it is scary to imagine what will happen when unemployment increases, because then contributions to the social budget will decrease. If the government proposes to reduce the contribution pension in the second level by shifting one percentage point to the first level , at a time when unemployment is relatively low, I’m afraid it’s a pretty bad compromise,” Arefiev said.
He also emphasized that by reducing the contribution pension in the second level to 5%, at a time when the ratio of working people to pensioners is decreasing, the income replaceability coefficient could decrease to 25-30% of the amount of funds that people have received while working in 2040-2050 .