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|  If you decided to participate

If you decided to participate

What is the pension accumulation system?

What will be accumulated?

Who can participate?

What will influence the size of the accumulated pension?

How is the accumulative pension formed?

How is the investment return and safety guaranteed?

May I change a pension fund?

How much does the accumulation cost?

How to choose a pension fund?

Pension accumulation system – safe and credible

How are the pension accumulation companies supervised?

Are the assets accumulated in a pension fund secure in case of bankruptcy of a pension accumulation company?

For those who strive for absolute safety...



What is the pension accumulation system?

 

The pension accumulation system is a possibility to accumulate for your old age pension. Those who decide to participate in the new accumulation system will direct a part from the contributions now paid to SoDra, the additional contributions from their salary to their personal account in the chosen pension fund and receive additional contribution from the state budget.

When participants of pension accumulation reach their pension age, they will get the pension from two sources - social insurance and their accumulated assets.

The introduction of the pension accumulation system is an important step when modernizing Lithuania’s social insurance system. The assets belonging to the participants of pension accumulation will be invested in Lithuania’s and world capital markets in order to protect them against inflation and receive the investment return.

Pension accumulation based on the investment not only provides a possibility for Lithuania’s people to get larger pensions, but also speeds up the growth of the country’s economy. 

What will be accumulated?

 

A part of social insurance contributions dedicated for old-age pension, the additional contributions from participant’s salary and the contributions from state budget will be accumulated. The part of social insurance contributions that was transferred to the pension funds was gradually increasing from 2.5% in 2004 to 5.5% in 2007. Although, after Lithuania was hit by Global financial crisis the contribution rate to pension funds was lowered to 3% and then again lowered to 2% in 2009. It will again be lowered to 1.5% in 2013 but raised to 2.5% in 2013.

From the year 2014 2% of the person’s salary will be transferred to the pension fund from the social security contributions. The employer will also transfer additional 1% of contributions from the person’s salary to the pension fund and the contributions equal to the 1% of the average salary of the year before last.

From the 2016 the additional contributions from the person’s salary will rise to 2%. The rate of contributions from the state budget will also rise to the 2%. From the year 2020 the rate of contributions from the social security contributions will also rise and equal 3.5% of person’s salary.

The general tariff for social insurance contributions is not changed. Those who decide to participate in the new pension accumulation system pay the same social insurance contributions as the ones who do not participate in pension accumulation system and pay additional contributions to the chosen pension fund. When a participant chooses a pension accumulation company and concludes an agreement with it, the employer will continue transferring monthly social insurance contributions together with additional contributions from the participant’s salary to SoDra, which will transfer a part from it to a pension fund. 

Who can participate?

 

All people who pay contributions for the whole social insurance pension and who have not yet reached the old-age pension age can participate in the new pension accumulation system.

You can sign a pension accumulation agreement anytime you start working and paying the social insurance contributions. The contributions will start to be transferred to pension fund at the third month after the registering your pension accumulation agreement.

The persons that are already participating in the pension accumulation can choose if they want to continue the accumulation according to the new rules in the year 2013. From 1 April 2013 to the 30 November 2013 the person can write a request to the pension accumulation company to either pay the additional contributions from his/her salary to the pension accumulation fund or terminate the transfers of contributions. If the transfers of contributions to the pension fund will be terminated the sum already transferred will remain in the pension fund and be invested till the retirement age. By default, the persons that will not write a request will transfer to the pension fund only the part of the social security contributions.

The new participants that will sign the pension accumulation agreements after the 1 January 2013 will not have the possibility to accumulate only the part of the social security contributions and will only accumulate the pension transferring the additional contributions from his/her salary and receiving the contributions from the state budget 

What will influence the size of the accumulated pension?

- accumulation period (the longer the period both the more contributions and investment return are accumulated so the younger a person is the more worth it is to accumulate);
-If you accumulate both the part of social insurance contributions, additional contribution from your salary and receive the contribution from state budget the accumulated assets would be larger;
- salary size (the bigger the salary, the more contributions are transferred to pension fund);
- investment return;
- deductions for the benefit of the accumulation company (the larger tariff for the administration of accumulative assets, the smaller sum will be accumulated). 


How is the accumulative pension formed?

Accumulative contributions will be invested. It means that the securities and other assets will be purchased for it, the interest gained and then invested again. When the participant reaches the pension age, pension will be paid using the accumulated assets. That is why it is important that the accumulative assets will be invested properly for the value of assets to increase.  

How is the investment return and safety guaranteed?

The Law anticipates the investment rules that must be followed by the managers of accumulative assets.
- The list of objects to be invested:

·         Money market instruments;

·         Deposits to call with maturity lower than 12 months;

·         Sovereign bonds;

·         Company bonds (Of the companies that are regulated by the EU member countries);

·         Mutual fund units;

·         Stocks;

Only the safest and the most secure bonds and other assets that correspond to the requirements set by the Law can be bought using accumulative assets. Real estate cannot be bought using pension accumulation assets. It is forbidden to invest assets to precious metals or the real estate.

-  Investment breakdown or risk diversification rule.

This rule defines that the assets to be invested have to be diversified in certain proportions according to the investment objects, i.e according to the objects they are invested in. The amounts of securities and other assets that are allowed to purchase are set forth. For example, a fund management company is not allowed to invest more than 5% into one certain object, lets say into “X” company shares. Thus the risk, which may occur if a large part of the assets is invested into one object the value of which decreases significantly because of the unfavorable market situation or other factors, is eliminated.

Established investment rules ensure that the investments are secure and provide income.

Pension funds differ by the objects of investment and the proportions of investment. The investment aspects of a pension fund are stipulated by its rules that are approved by the supervisory institution. 

Pension fund investment return depends on the investment approach. As a rule, the funds investing into shares earn more, but these investments bear more risk. When choosing a pension fund, study its rules carefully and then decide what kind of risk is acceptable to you.
 

May I change a pension fund?

 You are allowed to change the pension accumulation company after at least one contribution have been transferred to the pension fund.

It is important to know that conversion to another company may cost. These payments have to be indicated in the rules of a pension fund. The laws also establish the margins for these payments – when changing the pension accumulation company once a year, transferring payment cannot exceed 0.05% from the assets in the account. Once a year you can change the pension fund within the same pension accumulation company free of charge. If the changes occur more frequently, you may have to pay up to 0.05% from the value of the account. Every accumulation company will establish its maximum deductions; therefore, you should carefully read pension fund rules of a fund you are about to choose. 


How much does the accumulation cost?

 As every service provided, pension accumulation costs as well. For the administration of accumulative assets, a pension accumulation company charges payments. In order pension accumulation participants have fewer problems when comparing, the law allows only two kinds of deductions. It also establishes the maximum tariffs of these deductions.

A pension accumulation company is not allowed to charge deductions higher than 2% from every contribution to a pension fund in the year 2013. From the year 2014 the deductions from contributions to the pension fund will be lowered by 0,5% each year until they reach 0% in the year 2017. Maximum deductions from assets in every pension account per year are 0,65% for conservative pension funds and 1% for all other pension funds. No other deductions from participant’s assets (contributions and investment income) are allowed.

It is important to know that a pension accumulation company has to establish maximum deductions not exceeding the limits defined by the laws in the rules of its pension funds. Therefore, pay attention to the maximum deduction limits established by the rules of your chosen pension fund – in the beginning, when striving to attract more clients, pension accumulation companies may offer very small administration deductions, and later increase them up to the limits defined by the pension fund rules.

Your participation in pension accumulation costs have not only direct costs. For the period when a part of social insurance contributions will be directed for pension accumulation, relatively smaller social insurance pension will be calculated for you. Using pension calculator may help you comparing how it will decrease and what accumulative pension you can expect, depending on the pension fund investment return and the administrative deductions applied. Other social insurance benefit payments (sickness, maternity, disability, unemployment) will not decrease because of your participation in pension accumulation.
   

How to choose a pension fund?

1) Consider your future accumulation period – the longer the period, the more risky pension fund you should choose (the investment return of a high-risk fund during a longer period should be much bigger than return of conservative investment pension fund).
2) You should choose the pension fund which deductions suits best to your investment strategy. For those who plan to accumulate the pension for longer period, the deductions from full accumulated sum should be smaller, while those who will have a short accumulation period are advised to choose a pension fund offering smaller deduction tariff from the contributions paid.
3) Consider the profitability of a pension fund in a long-term. Since investment is a long-term activity, one should not choose the pension fund by it‘s short term profitability but by long-term results. You should choose the pension fund by the long-term trend of it‘s profitability, because poor results for one year might have been influenced by unfavorable situation in the market and not by the unsuccessful fund management. 
4) Pay attention not only to the size of deductions, but to its combination with the fund‘s profitability. The size of the tariff can be the basis for choosing fund only during the first years when the profitability of the pension funds is not clear. However, when choosing a fund during the subsequent years, not only the deduction of the fund, but it‘s results are important. The funds which deduction tariffs are higher can be much more profitable than others and give a better overall investment return.
 

 Pension accumulation system – safe and credible

Pension accumulation is a process of special importance for every person, therefore the laws regulating it prescribes certain “safety-catches”, the purpose of which is to ensure that the system would be credible, stable and safe.
Only those pension accumulation companies that have special licenses and permits are allowed to perform pension accumulation activity. Those are life insurance companies, having the permit to engage in pension accumulation activity and pension fund management companies. 
Supervisory institutions issue permits to the companies only after checking their professional, organizational and technical preparations, i.e. make sure that they have adequate required capital, managers with impeccable reputation, experienced and qualified personnel, installed and smoothly running necessary information systems etc.
    

How are the pension accumulation companies supervised?

The activity performed by pension accumulation companies is constantly supervised and controlled by the State. Supervision of both life insurance companies and pension fund companies are performed by Supervision Service of the Bank of Lithuania (Lithuanian Central Bank).  This institution issues permits and licenses to those companies, regularly check their activity, accepts financial statements from pension funds etc. Every pension accumulation participant who thinks that the actions performed by the accumulation companies may infringe his/her rights or interests may in any time make an appeal to the Supervision Service.  This institution have a wide range of rights and authority that allow quick response to any appeal, complaint or violations and impose certain measures (charge fines, demand for the restoration of harm or even cancel the permit to engage in pension accumulation activity). 

Particular attention is paid to the “transparency” in the activity of pension accumulation companies. Therefore, the laws stipulate that pension accumulation companies:
· shall present financial statements to the supervisory institution on the regular basis;
· yearly report of their activity shall be published in a daily newspaper;
· once a year pension fund shall inform the participant about the status of his/her account;
· every day pension fund shall announce the value of an account unit of every pension fund (according to it every participant can calculate the value of his/her account);
· if requested by a participant, at any time provide a possibility for a participant to receive the information about the amount of assets in his/her account, choice of investment possibilities and other information related to the activity of the company and important to the participant.



Are the assets accumulated in a pension fund secure in case of bankruptcy of a pension accumulation company?

Pension fund is kind of a „sack of money” which is invested according to certain strategy.  Ownership rights to it belong to the participants of that fund. Every participant of a fund has a personal account, where part of this joint property which belongs to him/her is recorded (the number of pension fund units is recorded in the account so value of person’s assests can be calculated by multiplying the pension fund units by the daily announced value of a fund unit).  These assets do not belong to a pension accumulation company; it only manages them by right of trust in the name of participants.
Thus, according to the laws, the assets of participants are separated from the assets belonging to a pension fund company.  Therefore, these assets cannot become the basis for any claims of the company’s creditors. If the company stops its activity (due to bankruptcy, reorganization or liquidation), the participants transfer their assets to another accumulation company.
Accumulative assets do not enter the account of the company – the contributions from SoDra are transferred to a special pension fund account that cannot be used by the company. These assets are not included in the balance of the company as well – the accounting of the participants’ assets is separated. The places for keeping accumulative assets are separated as well. They are stored not in the pension accumulation company, but in a special bank – depository, that serves as important part in pension accumulation system. The assets are managed through depository, thus it performs the service of transferring the money only after checking if the transfer meets the requirements of the laws. The depository is also supervised by the Supervision Service of the Bank of Lithuania.  
Since a pension fund company does not posses the assets of the participants, even in cases of company’s bankruptcy it will remain safe. The separation of assets is one of the most important guarantees for safety of the assets accumulated by the participants.
   


For those who strive for absolute safety...

Every pension accumulation company must have one pension fund with conservative investment strategy that is mostly suitable for persons who do not want to take any risks and those who will accumulate the pension for comparatively short period (less than 15 years).

The assets in this fund are invested only in debt securities issued or guaranteed by the Government of Lithuania, the governments of member states of the European Union or the members of the Organisation for Economic Co-operation and Development, their central banks, as well as those issued or guaranteed by the European Central Bank. These securities have small but stable investment return and are one of the safest investment objects, because the governments of the states that issue them are responsible for their redemption.


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