LATVIA - The Latvian government has revealed new pension reforms are being planned to come into effect from January 2011 in an attempt to further reduce the budget deficit.

In a Letter of Intent and Technical Memorandum of Understanding to the International Monetary Fund (IMF) - which sets out the policies to be implemented following financial support from the IMF - Latvia noted the pension system is one of the areas where "substantial further spending cuts" are needed from 2011.

The letter, which was approved by the IMF and allowed for the disbursement of a further €195.2m to Latvia at the end of August, noted that under current plans to reduce the budget deficit by LVL 500m, pension indexation has already been suspended for next year.

However it stated from 2011 it intends to reduce the deficit to 3% of GDP in 2012, and as it wants to avoid increases in income tax it has identified two areas where "substantial" spending cuts are needed - public services, particularly in relation to wages, and the pension system.

Latvia confirmed that in order to preserve the sustainability of the three pillar pension system, "we will also prepare a pension reform with international assistance and in close cooperation with social partners before 1 July 2010".

It added: "In this context we will review all special pension regimes. It [the reforms] will be implemented from 1 January 2011".

Responsibility for the pension changes will lie with the Ministry of Welfare however there are not yet any solid proposals about the types of reform envisaged, as the cooperation and assistance from social partners and international lenders mean the concept is not expected to be finalised until the middle of next year.

Meanwhile previous planned changes, such as proposals to gradually increase the pension contributions to 10% of salary are still frozen, and in June the government confirmed the initial round of spending cuts to comply with IMF requirements would result in the pensions received by working pensioners being reduced by 70% from 1 July 2009 to 31 December 2012, in an effort to save LVL 37.8m.

Meanwhile retirement and length of service pensions already in payment have been cut by 10% to save LVL 30.5m. (See earlier IPE article: Latvia to tackle budget deficit with pension cuts)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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