LITHUANIA - An economic crisis plan approved by Lithuania’s incoming government includes a proposal to reduce contributions to the second pillar pension system.

The four-party conservative-led coalition is facing a 2009 budget deficit of 4% of GDP and the crisis plan is intended to save LTL5.3bn (€1.53bn) and has announced plans to cut public spending by around $1.9bn (€1.48bn).

Among the proposals in the crisis plan is a reduction of the contributions to the private pension funds from 5.5% of a salary to 3%.

Announcing its policy priorities, new prime minister Andrius Kubilius described the situation the government had inherited as like a ‘time bomb’.

Market players feel because of time constraints imposed by the need to pass a new budget before the end of the year, the government is overlooking another time bomb in favour of a quick fix.

“The demographic situation is not changing,” noted Jonas Irzikevicius, managing director of SEB investiciju valdymas, one of Lithuania’s largest pension fund managing companies. “And the government is not proposing any other solution to solve the pension issue as a whole. And that is a worry.”

“This is very hazardous because it could undermine public confidence in the whole private pensions system,” said Aurimas Mazdzierius, CEO of Hansa investiciju valdymas, another manor pension fund managing company. “People joined it in the expectation that they would be making contributions at a certain level and they will understand that lower contributions mean that their eventual pension will be smaller. This may make them question their decision to participate.”

Mazdzierius added: “It is also dangerous because it sets a precedent for some future government with funding problems.”

“The new pension system was not launched for two or three years but for the next 20, 40, 50 years,” noted Saulius Racevicius, president of Lithuania’s investment management companies association which is in discussions with the government.  “The state should keep promises to its citizens.”

The initiative is seen as reversing the pension reform, which many see as one of the most successful reforms undertaken since Lithuania emerged from the Soviet Union in 1991. Some 70% of Lithuania’s eligible population has signed up to private second pillar pension plans.

Under the pension reform, individuals can divert 5.5 percentage points of the 18% of their salary paid to the pay-as -you-go State Social Insurance Office (SoDra) into a private pension fund of their choice. This is transferred to the private pension funds from SoDra, which collects 18% of a salary as pension contributions and retains 12.5% to fund state pensions.

“We have agreed that the government needs to find some sources of financing but this is not the best way,” said Racevicius. “Our proposal is not to reduce the pension contributions but that the government issue special state bonds that the pension funds will buy and this way we can help it solve its cash flow problems.”

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