Proposed changes to Lithuania’s quasi-mandatory second pillar pensions system have been widely criticised as a threat to the system as a whole.

The government – a coalition led by the centre-left Social Democrats – said the aim is to increase the attractiveness and flexibility of the second pillar, ensure the voluntary involvement of participants and employers, and balance financial incentives.

At present, there is automatic enrolment, with a limited ability to opt out.

The changes include abolishing auto-enrolment, instead encouraging the public to save voluntarily. Participants would be allowed to choose the optimal amount of their contributions, currently 3%, and – under certain circumstances – to suspend them for one year, with the ability to extend this period.

The 1.5% state top-up on contributions would be abolished, replaced by income tax relief.

Before reaching retirement, savers would be allowed to withdraw up to 25% of accumulated funds, once only. They would also be allowed to withdraw all their funds in certain circumstances, for example, where a serious illness had been diagnosed.

The state social security (Sodra) information portal would be updated to allow residents to receive information about pension rights acquired in all pension pillars.

The Ministry of Social Security and Labour (SADM) said: “Around €300m per year is allocated to subsidising savings in the second pillar, while contributions to the pillar are subject to income tax. This model, with subsidies provided only to a part of the population, is expensive, causes social tension, and prevents more flexible withdrawal of accumulated funds.”

But Tadas Gudaitis, chair of the board at the Lithuanian Investment and Pension Funds’ Association (LIPFA), said: “The changes are a mistake, because they would break the system and negatively affect mostly people on lower incomes.”

This means people would depend much more on the first pillar and the state, Gudaitis warned.

He said: “In the long term, the state would have to spend a higher share of GDP – which means more taxes – or let in hundreds of thousands of migrants, to create additional working numbers.”

And he added: “We are facing the most challenging times geopolitically, and will have to invest more in our defence and infrastructure. The pension system needs to be stable, so pension funds can invest more without staying in liquid assets.”

PensionsEurope called on the Lithuanian government to reconsider the reforms, warning they would severely undermine the country’s retirement system and weaken pension adequacy.

It said: “Abolishing the state matching contribution and replacing it with a tax refund mechanism will drastically reduce incentives to save, disproportionately impacting lower- and middle-income earners.”

PensionsEurope warned that removing auto-enrolment would likely cause participation rates to decline rapidly, leaving many individuals with significantly lower retirement savings.

“The scheme will require time to mature and deliver full benefits,” it concluded. “Targeted measures should be adopted to enhance its effectiveness, including public education campaigns and incentivising employers’ contributions to the second pillar.”

SADM has secured guidance on creating a sustainable pension system through the European Commission’s DG REFORM initiative, using high-level pension experts.

PensionsEurope called for the Lithuanian government to await its recommendations before implementing any changes.

But the government intends to hold consultations on the proposals this month, presenting a bill to the Seimas (parliament) in its spring session.

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