LATVIA – Latvia’s third-pillar funds generated impressive results in 2012, according to the Financial and Capital Market Commission (FKTK), the sector’s regulator.

Profitability increased by 215% to LVL1.6m (€2.3m), net assets by 24.7% to LVL142.4m and membership by 4.5% to 207,523, equivalent to 19.8% of the economically active population.

Contributions by individual members in 2012 shot up by 28.9% to LVL14.8m, while employer contributions fell by 5.6% to LVL6.4m.

The Latvian third pillar, which started operating in 1998, has 18 plans run by six open-ended funds and one closed-end fund.

Returns in 2012 ranged from 2.2% to 11.3% and averaged 8.5%, compared with an average loss of 2.7% in 2011.

The second-pillar system, in operation since 2001, also expanded, with membership up by 3.2% to 1.2m.

While the system is only obligatory for workers born after the beginning of 1971, the number of older workers has grown over the year and accounted for 41% of all participants.

Net assets grew by 17.2% to LVL1bn, with the growth rate set to accelerate in the coming years.

The contribution rate, which was slashed from 8% of gross wages to 2% in 2009 following the financial crisis, is rising to 4% in 2013-14, 5% in 2015 and 6% the following year.

The overall state pension contribution remains unchanged at 20%.

The government has felt able to raise the contribution rates again following Latvia’s dramatic economic turnaround.

In the wake of the global financial crisis, Latvia’s overheated property market collapsed, as did the economy.

In 2009, real GDP plunged by 17.7% while the budget deficit ballooned to 9.8% of GDP and unemployment more than doubled, hitting 18.7% the following year.

The recovery started in 2011 when GDP rose by 5.5%, and it is estimated to reach 5.3% in 2012, the fastest growth in the EU.

With the budget deficit down in 2012 to 1.5% of GDP, the country is set to join the euro-zone in 2014.

Returns from the 26 second-pillar plans offered by the eight licensed funds ranged from 0.7% to 11.5%, and averaged 9%, compared with minus 2% in 2011.

Conservative, bond-based plans returned an average 8.4%, the balanced funds 9.2% and equity weighted active plans 9.1%.

The FKTK said the good performance from Latvian state bonds in 2012 contributed to the improved returns.

Over 2012, both classes of funds increased their share of debt and other fixed income securities to 42.9% for second-pillar funds and 29.1% for the third pillar, and into investment funds, to 35.9% and 55.2%, respectively, while cutting their share in time deposits, to 20.3% and 15%, respectively.

While the second-pillar funds raised their small share in stocks and variable rate securities to 0.8%, the third-pillar funds decreased theirs to 0.3%.

Given the small size of the Latvian capital markets, both classes invest the bulk of their assets abroad, 53% for the second pillar and 68% for the third.

In both cases, because of the high share of assets allocated in investment funds, Luxembourg and Ireland are the main destinations.

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