LITHUANIA – The Lithuanian Parliament (Seimas) has passed a package of laws intended to reform the pensions system, with some reforms being first signalled by the government more than a year ago.

Although October's elections resulted in a change of the parliamentary majority to a centre-left coalition, with a new government formed accordingly, the outgoing parliament approved the reforms in the final days of its term of office.

The president has yet to sign the new law for the changes to come into force but is widely expected to do so.

The new rules include allowing pension fund members to make additional contributions, to be topped up by the government.

At present, employees who choose to make second-pillar provisions get a percentage of their social tax contributions redirected into a personal account with their chosen private pension fund, instead of paying the full amount into the pay-as-you-go system (SODRA).

This means they forego a share of their state pension from SODRA, but receive a second-pillar pension instead.

The current level of the second-pillar contributions is 1.5% of salary, and it should increase to 2.5% in 2013.

The new laws provide for contributions to then go down to 2% of salary in 2014, but allow an additional 1% as an optional payment from a member's after-tax salary income.

This would be boosted by a government subsidy equal to 1% of the statistical average national salary.

'Old' pension fund members – who entered the system before 2013 – will have to notify their pension fund provider between April and September next year if they want to pay additional contributions.

Alternatively, the new law says that, during the same period, they can say they will stop paying into their second-pillar pension and rely more on the state PAYG system.

A member who does not take any action regarding these changes in 2013 will remain within the original set-up, where part of their social taxes get redirected to a private account in the pension fund of their choice.

The new members of the second pillar who join the system after 2013 will automatically enter the new system, which requires them to make additional personal contributions, to be topped up by a state subsidy.

Furthermore, the changes provide that the additional contributions will increase to 2% of the member's actual salary after 2016, with a government top-up of 2% of the average national salary.

Marijus Kalesinskas, chairman of the board of the Lithuanian Pension Fund Members Association (LPFMA), said: "These new legal amendments are marginally beneficial for second-pillar pension fund members, especially to those earning salaries close to or lower than average – mainly because they provide more choice and offer some incentives.

"On the other hand, they make the pension system even more complicated and hard to understand for the average member – and indeed mix up the principles of the existing second and third pillars into one."

Other proposals include reducing the maximum fees that can be charged by pension fund management companies from their current level of 1% a year on assets under management, to 0.65% for the conservative (government bond only) pension funds after 2013.

Fees for all other funds – with investment policies allowing some risky assets – will be left at 1% a year.

Kalesinskas said: "Some proposals are potentially beneficial for pension fund members, such as more freedom to move between pension fund managers, and the new limits on managers' fees. But they are all secondary in importance to solving the main problem – the stable financing of second pillar contributions."

Last December, parliament approved measures to cut second-pillar contributions to 1.5%.

Contributions had previously gone as high as 5.5%, before an initial reduction to 3% in 2008.

The government said the series of cuts, carried out to help reduce the budget deficit, would only be temporary.

At end-2010, the LAPF sued the government for compensation amounting to the value of extra contributions that would have been transferred to the private plans had the percentage remained at 5.5%.

LAPF said the cuts were potentially against human rights and unconstitutional.

The lawsuit was eventually passed from the lower courts to the country's Constitutional Court, which issued a statement in June this year; this has since been subject to interpretation.

"As far as we can see," Kalesinskas said, "the Constitutional Court said the reduction in contributions is not against the Lithuanian constitution, but only if a clear compensation mechanism is provided.

"When the government first announced the cuts, they set out a legal procedure for providing compensation. Later the compensation provision clause disappeared from the law.

"This is therefore still potentially unconstitutional as the Constitutional Court has clearly stated that the lawmakers should provide the compensation mechanism for the contribution reductions to be enacted in law."

Kalesinskas said that the LPFMA would take a decision within the next few months as to whether to pursue further action, including possibly applying to the European Court of Human Rights in Strasbourg.

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