LITHUANIA – Assets in Lithuania's 30 voluntary second pillar funds grew by 13.1% year on year to LTL5bn (€1.5bn) at the end of June 2013, despite an only 2% increase in membership, according to a recent report by Bank of Lithuania.
While market conditions accounted for some of the asset growth, the main driver was the rise this year of the base contribution rate, from 1.5% of gross wages to 2.5%. The report by the country's central bank and financial regulator also found that membership had increased only marginally, by 20,983 to 1.09m.
Of the four types of funds available, those with a medium equity exposure of 30-70%, remained the most popular, accounting for more than half the membership and assets, followed by low equity funds – up to 30% exposure – serving around a quarter of members. The remainder were split between conservative funds invested in sovereign debt and the high-risk funds that invested between 70-100% in equity.
The market remained highly concentrated, with three of the nine licensed firms – Swedbank Investment Management, SEB Investment Management and Aviva Lietuva – accounting for nearly 80% of assets and membership. One, Citadele Investment Management, lost its second and third pillar licences this April.
Since the start of the year the higher risk vehicles generated the best returns, ranging from 4.42% by the equity funds to only 0.04% from the government bond funds, with an average return of 1.63%. The picture changed markedly in the second quarter, with the funds registering an average decline of 1.3%, ranging from -0.53% for the conservative funds, to -1.62% for the medium equity products. Only five funds succeeded in generating positive returns.
Mutual funds accounted for 53% of all investments at the end of June 2013, a third of which were equity funds, and 18% fixed income. The high investment in mutual funds accounted for Luxembourg’s popularity as the main investment location, with close to 30% of assets. Some 64% of all assets were denominated in euros.
The dynamics of the second pillar are likely to change in 2014, when the base contribution rate falls to 2%. Workers will have the option to make an additional contribution from their wages of 1%, matched by a further 1% from the state: the so-called "2+1+1" formula.
Those who joined the second pillar this year are obliged to make the additional contribution, while existing members have to inform their fund managers that they want to take up the option, or alternatively leave the second pillar. Those that fail to inform their managers will by default remain in the second pillar, but pay only the base rate.
The deadline for reaching a decision was recently extended from 1 September to 30 November. Thus far, the results have been relatively encouraging, with those choosing to make the extra contribution far outweighing those who choose to leave. According to SoDra, the state social insurance fund responsible for the first pillar, as of September 2, 192,800 existing members had chosen to make the additional contribution, alongside 36,100 new members, while only 8,100 would be leaving the second pillar.
The government has been keen to promote additional savings in the second pillar as a means of increasing retirement income while eventually reducing the burden on the overstretched SoDra.
The third pillar, meanwhile, remains small by comparison. Here, assets as of the end of June grew by 14.3% year on year to LTL112.2m and membership by 10.9% to 30,846.
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