PENSION FUNDS IN LITHUANIA AND ABROAD: PEOPLE PARTICIPATION

VILNIUS GEDIMINAS TECHNICAL UNIVERSITY
BUSINESS MANAGEMENT FACULTY
DEPARTMENT OF ENTERPRISE ECONOMICS AND BUSINESS MANAGEMENT

PENSION FUNDS IN LITHUANIA AND ABROAD:
PEOPLE PARTICIPATION

Made by: VV-2 gr. A.Baloban

Checked by: Doc. M.Tvaronavičienė

Vilnius
2004
CONTENT

INTRODUCTION 3
PART 1 4
PENSION REFORM AND FUNDS 4
What is the Pension system reform in principle 4
The key goals of the pension reform are: 5
Structure of pension funds 6
Safety of savings 8
Switching to another saving enterprise 9
How to join Pension fund? 9
Vilnius bank pension funds 10
Hansa bank pension funds: Lithuania 12
Hansa bank pension funds: Latvia 14
Hansa bank pension funds: Estonia 16
PART 2 19
STATISTICS AND COMPARISON 19
PART 3 22
Consideration of pension funds 22
CONCLUSION 24
REFERENCES 27

INTRODUCTION
The social security sy ystem in Lithuania is comprised of the social insurance system, the medical insurance system and the social support system. The most significant components of the State social security system are the social insurance system (including pension insurance) and the medical insurance system. Though the 30 June 1999 Law on Pension Funds came into effect on 1 January 2000 already, private pension funds do not actually function yet. At present, all employees are insured on a mandatory basis, but the reformed pension system started functioning fr rom 1 January 2004. Employers (i.e. Lithuanian economic entities or individuals that pay wages to employees) are required by the law to pay or withhold contributions in full on behalf of their employees. Additionally, the law also provides for voluntary social insurance.
Debates on

n pension reform started in Lithuania back in 1994. Today we have 2004, but the debates are still going on. One may conclude that Lithuania, being on the periphery of these worldwide developments, has not realized yet the magnitude of problems that the pension system is causing. Or, one may say, the difficulties that the reform will pose are understood much better than today’s problems.
Naturally, every reform requires a great deal of resources – ideas, people and money – to change what has been normal, familiar and customary for many years. In every system, regardless of the degree of its usefulness to the society, there are people who are content with status quo and do not want any change.
Of course, the lot of f reformers is not something to be jealous of. But it is the mission of politicians to create a legal environment or to change it so that people could create prosperity today, tomorrow and for many years to come.

PART 1
PENSION REFORM AND FUNDS
What is the Pension system reform in principle? The reform of the pension system implies a gradual transition from the current pension system based on redistributive principles to a system based on savings.
In Lithuania at the pr

resent, all social insurance taxes collected by the State Social Insurance Board of Lithuania (SODRA) are being immediately redistributed through pensions and other means of social support.
This implies that currently employed persons are supporting current retirees and other recipients of social support. With the establishment of saving funds, each person will be able to save part of the pension in the personal account, opened in a pension fund or in a life insurance company of his or her own choice.
One of the key features of the reform is the opening up of the possibility for each person, insured by the compulsory state insurance, to freely choose to save part of the pension in the personal account at the pension fund or life insurance company of his or her own choice.

The pension reform will proceed without altering the nature or size of the current social contributions. From the current social insurance contribution – 34 percent of earnings, 25 percent are allocated to the pension system.
With the establishment of the saving system, it would be allocated 5.5 percent (2004 m. -2.5 %., 2005m. – 3.5 %., 2006 m. – 4.5 %. And from 2007 m. onwards – 5.5 %.), while the existing current contribution-support system would receive 19.5 percent. The employers will continue to transfer the same contributions as they do

o now, and SODRA will transfer the necessary amount to the personal accounts in the pension saving funds.
The persons taking part in the saving plan, will then be the recipients of a pension from two sources – SODRA and pension saving funds.
The current contribution-payments social insurance pension system, designed in 1992-1994, has carried and continues to carry out an import mission.
However, supplementing the current pension system with pension saving funds would help solving problems of demographic nature (decreasing birth rate, ageing society), would make it more attractive to young persons, and would strengthen the mutual linkage between the social insurance contributions and the social support payments.
The key goals of the pension reform are:
1. To create the conditions for the insured persons to receive larger pensions.
2. To decrease the effect of an ageing society on the pension system.
3. To gradually decrease the rate of contributions for the pension insurance and thus lower the cost of labour force.
4. To strengthen the capital market and thus encourage the growth of Lithuanian economy.

Structure of pension funds
The pension system would entail three levels, each financed and governed in a different manner.
I current pension financing level. This level would ensure the basic protection against poverty in th

he old age, or in case of an illness. It would be financed based on the currently existing principles – relying on the current contributions.
II level – saving in private pension funds and insurance companies.
III level – voluntary saving for the retirement in pension funds and insurance companies.
For the persons who decide not to participate in the pension saving (the pension reform is voluntary), the pensions will be calculated according to the currently existing procedures.
For those who select to participate in the pension funds, the pension will be calculated in a different manner based on different periods:
– for the period prior to joining the pension fund, the pension will be calculated entirely by SODRA;
– after joining the pension fund, the pension will be calculated in proportion to lower contribution, with a person receiving additional payments from the pension fund.
Benefits of joining Pension fund
The key advantage of a voluntary pension saving is that the current nature and the size of the contribution will not be altered. The current size of the social insurance contribution is 34 percent of all earnings, 25 percent of which are allocated to the pension system.
If a person selects to participate in the voluntary pension saving, he /she would be allocated 5.5 percent (2004 m. -2.5 %., 2005m. – 3.5 %., 2006 m. – 4.5 %. And from 2007 m. onwards – 5.5 %.), while the current system of contributions-payments would receive 19.5 percent.
If a person selects to participate in the voluntary pension saving, her employer will continue to transfer the same contribution to SODRA as he / she does now. SODRA will then transfer the necessary amount to the personal account in the pension saving fund.
Consequently, a person participating in the pension saving, will be a recipient of a pension from two sources – SODRA and a private pension saving fund of his /her choice.

All of those selecting pension saving, will be entitled to the following payments: one-time-only (when the amount saved is small), periodical payment, and an annuity (to be paid for the lifetime). Annuity will only be paid by the life insurance companies – a person can choose a company and conclude with it a contract, which specifies an annuity to be paid.
All other payments will be issued by the insurance companies and by the pension funds. If a person is deceased prior to his /her retirement age, the amount saved (and the interest accumulated) will be inherited. (In case of a death of a retiree, who concluded an annuity-paying life insurance contract, the savings are not subject to inheritance).
The size of contribution
During the first years of the reform, a contribution for the savings insurance would equal 2.5 percent, the same percentage that an insured person is paying at the present.
The rate of the savings contribution would gradually increase by 1 percent annually until it reached 5.5 in the year 2007.
The general rate of the social insurance contribution would not go up. At the present, the pension insurance is allocated 25% of all the contributions collected by SODRA.
If a person chooses level II, this amount will simply be split into two parts: one will be devoted to savings, and the other, as previously, will remain in SODRA.
If a person decides upon a bigger size of pension, he / she will be able to contribute the additional amount to a pension fund or an insurance company of his /her choice.
Safety of savings
Seeking to ensure the safety of the companies undertaking savings operations, the state will provide strict guidelines to such companies.
First of all, apart from the requirement of start-up capital, there will be requirements concerning impeccable reputation of the employees and, particularly, of managers for the establishment of such enterprises. The activities of such enterprises will be strictly licensed and monitored by the competent state institutions.
To ensure the business transparency of these enterprises, they will have to provide public business activity and financial status reports.
The savings enterprises, while investing pension savings, will have to adhere to the appropriate investment requirements: for example, an enterprise will not be able to invest all of its wealth into securities, and especially, into the securities of any one specific enterprise. The so-called investment portfolio will have to be spread into various instruments of financial market – obligations, securities, bank deposits and so on.
In the event of the enterprise’s liquidation, third-party credit claims will not be satisfied at the expense of pension savings, since these assets are accounted for separately from the rest of the assets owned by such an enterprise.
Saving enterprises will be required to annually undergo an audit carried out by independent audit companies; also, such enterprises will be required to annually inform their clients about the size of his / her pension savings, held in the personal account.
Each pension fund and life insurance company will be required to form guarantee reserves to ensure relative revenue balance (the average revenue for all of the country’s funds counted).
Switching to another saving enterprise
Persons, willing to switch to another pension fund will be able to do so; however, a restriction for switching will be set for the first three years.
For persons who will be moving abroad and working there until the retirement, the part of the pension calculated at SODRA will be transferred to the country where the pension will be paid, and added to the pension earned in that country.
Assets accumulated in the pension fund, will be held the private property of that person and paid to him /her upon reaching the retirement age irrespective of the migration rules of the EU.
How to join Pension fund?
In order to join the system, a person has to sign a pension savings contract with a pension fund or a life insurance company, which, in turn, will inform SODRA about that person selecting to participate in the savings enterprise.
The deadline for reverting a part of the social insurance contribution to a chosen pension fund starting January 1, 2004, is July 13, 2003. For the following years, SODRA needs to be informed by May 1, in order to commence participation in the pension fund starting January 1 of the next year.
The delay between choosing and participating is necessary to allow for SODRA and the Ministry of Finance to adequately plan the next year budget.
However, once a person chooses to participate in the pension savings system, fully rejoining SODRA system will not be made possible (except in cases of full disability).
Vilnius bank pension funds
Vilnius Bank is quite stable and secure:
• It’s capital is 6.6 milr.
• It occupies 36% of Lithuanian cruet market.
• It occupies 40% of Lithuanian credit market.
• Vilnius bank workers are ones of the best finance market specialists.
Vilnius bank suggests 2 funds of the second level.
VB pension 1
VB pension 1 fund is up for persons, who:
– will attain the pension age quite fast;
– prefer to get smaller, but more stable revenue from pension payments;
– are not minded to hazard to invest share market.
The bankroll of this fund will be invested into Lithuanian Republic, European Union, economic relationship or European Central bank issued stocks.
The main aim, investing the asset of this fund – to secure the increase of stable bankroll value of fund, to dispense risk connected with investment, that the increase of bankroll value of the fund exceeds the increase of inflation.
Payments Pension 1
Administration payment – 2%; Control payment – 1%
VB pension 2
VB pension 1 fund is up for persons, who:
– will attain the pension age not very fast;
– have the aim to increase the payment value as more, and agree that the risk of investment can be bigger.
The part (20-50%) of bankroll of this fund will be invested into developed world market, Lithuanian and other Baltic countries firms’ shares. The rest part will be invested into Lithuanian Republic, European Union, economic relationship or European Central bank issued stocks, market money implements, cruets.
The main aim, investing the asset of this fund – to secure the biggest long-range increase of bankroll value of fund, to dispense risk connected with investment and reach to increase the spending power of members of payments for long period.

To participate in the accumulation is very easy:
– make pension accumulation contract in whatever Vilnius bank department;
– Note the chosen pension fund in contract;
– Mede the pension accumulation contract, the personal pension accumulation account will be open for you.
The later you will participate in pension accumulation the bigger your pension will be.
Made the contract you can see all the information about paid and stored finances on VB Internet system.
Hansa bank pension funds: Lithuania
In the “Hansabank” group the oldest in Baltic States investment manage company is acting. It started its action in 1994. “Hansabank” controls the biggest investment portfolio in the Baltic States, the worth of which is 1.2 milr. Lt.
“Hansabank” suggests to make pension accumulation contract as possible earlier. The follows table shows the credible extra pension part’s change during accumulation period according to age
Age during contact making (years) 45 40 35 30 25
Credible extra pension part’s increase (%) 28 31 33 36 38
Of course, the “Sodra” extra pension part will decrease proportionally to payments into pension fund during the period of accumulation.
The scheme of bankroll accumulation in fund is such:
Yours and Your employer’s payments to “Sodra”, 34% of wage

“Sodra”, 2.5-5.5 % of wage

Your account in Hansa pension fund
Hansa pension suggests to accumulate finance on the one of three pension funds. These funds one from another differs according planned accumulation term and earning potential.
• Pension 1 – the medium investment direction, when the investment value increases equally, without big swings, so therefore is the most suitable for older customers (from 45 years)
• Pension 2 – has the bigger earnings potential, but the investment’s value in fund increases not equally, therefore is suitable for middle age people (from 30 till 45 years).
• Pension 3 – has the greatest earnings potential, but the value of investment can swing. This fund is suitable for those members, who invest for the longest period of time and whose age is up to 30 years.
As been mentioned, the main criteria choosing pension fund is the age of customer. The table below shows pension fund choosing scheme.

Pension 1 XXXXs SSSSSS ssssssss ssssssss
Pension 2 XXXX XXX XXXXX
Pension 3 XXXX XXXX XXXX

20 25 30 35 40 45 50 55
the age of person

from 45 m.years 30-45 years Till 30years

Pension 1 – the medium investment direction. The investment value increases equally, without big swings Pension 2 – has the bigger earnings potential, but the investment’s value in fund increases not equally Pension 3 – – has the greatest earnings potential, but the value of investment can swing.

How to make Hansa pension contract? Hansa bank suggests good service system:
• It has 121 bank detachments that is the biggest number in Lithuania.
• There are about 1300 well instructed, high qualification specialists.
• Hansa.net customers have opportunity to sign up contracts by Internet. And later to supervise account by Net.
• To make contract you must have passport and social insurance (Sodra) book.
Hansa bank pension funds: Latvia
The present pension system of Latvia provides everyone with a possibility to ensure for himself/herself a well-off life also when they end their employment. It depends both on social tax payments made during the employment time and how profitable investments of social tax share envisaged for pension capital have been. So it also depends on the fact whether you have chosen a professional and competent manager of pension funds.
“Hansa Pensions” offers two types how to accrue your pension capital: “Stability” and “Dynamics”. It is easier to choose a pension plan -in this case either “Stability” or “Dynamics” – because you do not select it for a lifetime: you can change it every year. However, before you make any decision it is advisable to consult with specialists
2nd pillar pensions
Pension Plan “Stability”
When applying for “Hansa Pensions”, you can choose a way in which you want to accrue your pension capital. “Stability”, according to its name, is a conservative plan that ensures a stable growth of your pension capital. The funds envisaged for pension will be invested in promissory notes, bonds, banks’ deposits and in other financial instruments having a fixed yield.
“Stability” may be the most adequate choice for those who follow the principle “a bird in the hand is worth two in the bush.” So this pension plan is meant for people who do not like unexpected turns and who are not willing to take any risk. Pension experts advise this type of pension plan also if less than 10 years are left until your retirement.
Pension Plan “Dynamics”
When choosing the pension plan “Dynamics” as a way in which to accrue your pension capital, you can expect a more rapid increase in your pension capital because approx. 30 per cent of funds envisaged for investments will be placed in shares. It will be difficult to forecast the increase in the value of these investments, however, according to the worldwide experience, investments into shares over a longer period of time are more profitable than investments made in T-bills. By taking into account that, “Hansa Pensions” advise to choose the pension plan “Dynamics” for young people who like taking a risk.
Although you can change a pension plan every year, if you choose pension plan “Dynamics”, it is advisable to take into account that it is more reasonable to use this type of pension plan as long as possible, because in that way you will be able to use its advantages and opportunities much better. When you will not be willing to take any risks regarding fluctuations in share value just shortly before you retire, in order to maintain the accrued amount you will have an opportunity to join more conservative pension plan, namely, “Stability”.
3rd pension pillar pensions
The third pillar pensions provide that everyone can on voluntary basis accrue additional funds for his/her old age pension, thus increasing his/her welfare in the second half of his/her life. Starting from 2003 Hansa Open Pension Fund offers the opportunity to accrue one’s private pension by using the tax allowances stipulated by the law and experience and opportunities in investment management offered by Hansabank Group.
The private pension fund is governed by the Law “On Private Pension Funds”. Tax allowances are stipulated in the Law “On Residential Income Tax ” and in the Law “On State Social Insurance”. Thanks to the tax allowances , it is possible to substantially increase the welfare level without increasing expenses of the employer and without reducing personal expenditures.
In case a contribution into the pension fund is made by the employer under the collective or individual participation agreement, this contribution in the amount of up to 10% of the employee’s gross salary is not levied with social and resident income tax (salary tax).
If contributions are made the person by himself/herself in compliance with the individual participation agreement, this contribution up to 10 % of the person’s gross salary is not subject to residential income tax.
The capital of private pensions is accrued with the intermediary of pension plans.

Hansa Open Pension Plan offers three pension plans:
1. Stability+
2. Dynamics+ (EUR)
3. Dynamics+ (USD)

Stability+
Currency of the plan – LVL
Investment portfolio – conservative (100 % public and corporate bonds, deposits).
Pension plan is suitable for those who have 10 or less years left before they retire or for those who give their preference to a conservative investment policy.
Dynamics+ (EUR)

Currency of the plan – EUR

Investment policy – balanced (50 % shares, 50 % bonds and deposits).

Pension plan is suitable for those who have more than 10 years left before they retire, as well as for those who are ready to take a larger risk by expecting a larger capital yield and for those who want to accrue their pensions in EUR.

Dynamics+ (USD)

Currency of the plan – US dollar.

Investment portfolio – balanced (50% shares, 50 % bonds and deposits).

Pension plan is suitable for those who have more than 10 years left before they retire, as well as for those who are ready to take a larger risk by expecting a larger capital yield and for those who want to accrue their pensions in USD
Hansa bank pension funds: Estonia
The Estonian pension system is built on three pillars. In the first pillar, i.e. state pension, the role of the company is confined to deducting social tax from the pay of employees. The opportunity to influence this proportion in the individual’s pension is very limited.
The second pillar or the funded pension means that 2% of the gross salary of the employee is directed to the pension fund of his or her choice. Here, the role of the employer is much more significant, including reorganisation of accounting system, also enlightening employees in order to help them make appropriate choices with their future pensions.
The third pillar or the supplementary funded pension is the most flexible and provides the biggest opportunities for the employee and the company. With supplementary funded pensions, you can establish the payments during the collection period yourself. If a company has long-term goals and an integrated personnel policy, it is a fine opportunity to include pension insurance contracts in the motivation scheme of employees. A supplementary funded pension contract of the employee can incorporate life insurance as well.
There are several options for pension insurance:
• If pension insurance payments are of different amounts – a Pension Insurance with guaranteed interest (the life insurance part may be different from the collected amount and payments do not have a fixed amount)
• If one wants to peg its funds to the movement of the world’s stock markets – a Unit Linked Pension Insurance (flexible payments and life insurance in a suitable amount)

Pension Insurance with guaranteed interest Unit Linked Pension Insurance
Insurance Cover Customer’s choice, the amount may be left unfixed Customer’s choice, the amount may be left unfixed
Contributions If the initial payment is under 10,000, pursuant to a payment schedule If the initial payment is under 10,000, pursuant to a payment schedule
Making additional contributions Possible Possible
Profitability (EEK in contracts) Guaranteed interest 5% (can be changed once in 5 years) + additional interest Depends on the movement of stocks and the funds chosen
Can companies be policyholders? Yes, but there won’t be any income tax concession on the contract No
Is it possible to partially withdraw money out of the contract? Yes

More essential information about funded pension, i.e. the second pillar of the pension reform:
• The second pillar is mandatory for those born after 31 December 1982.
• Those born before 1 January 1983 can choose whether to join the scheme or not.
• The maximum age limit upon subscription to the scheme is as follows:
o People between the age of 51 and 60, before 1 June 2002 (1942 – 1951)
o People between the age of 46 and 50, before 1 November 2002 (1952 – 1956)
o People between the age of 42 and 46, before 1 November 2003 (1957 -1961)
• Those who will turn 42 in 2004 will have their last chance to join the scheme the same year before reaching the given age.
• The system will become entirely mandatory by 2025 when those born in 1982 have turned 42.
• Those who reach the retirement age shall be entitled to disbursements from their pension fund.
• To receive mandatory funded pension, one has to conclude an annuity agreement with an insurance company.
• If the annuity is less than ¼ of the national pension rate (NPR), one shall be entitled to periodical disbursements from the pension fund.
• If the annuity is higher than 3 NPR, one shall be entitled to periodical disbursements directly from the pension fund in the extent of the extra amount.
• In case of the death of an owner of the shares of a pension fund, the shares can be succeeded.
• The successor will have the right to request redemption of the shares (in total or in parts).
• State pension and mandatory funded pension funds do not attract tax to the extent of the triple minimum amount exempt of the income tax.

PART 2
STATISTICS AND COMPARISON
Now I would like to present some statistical data and make comparison analysis on pension funds market. I will introduce to you the number of pension accumulation contracts in three Baltic countries in different banks. So you can see what bank and of what country is more or less successful in at attracting people to their pension funds.
Table 1 shows the pension accumulation contracts registered in ‘Sodra’ in 2003- 12-08.

Quantity
“Hansabank” group 190 327
“VB investing control” 133 916
“Commercial union” 62581
“Nord/LB investing control” 26471
“Ergo” 14093
Others 14218
Whole 441606
Table 1

Figure 1
Figure 1 presents the same pension accumulation contracts registered in ‘Sodra’ in 2003- 12-08 expressed in percents.
So you can notice that Hansabank is a leader in Lithuania according to registered pension contracts. It takes more that 1/3 of the whole number of contracts made in 2003 year in Lithuania. The second place takes Vilnius Bank.
To compare number of contracts in Baltic countries I would like firs to present you the table from which we can see where the change strategy of pension reform is voluntary and where compulsory, because this influences the amount of contracts considerably.
Country Change strategy
Lithuania Voluntary
Latvia Compulsory till 30 years old
Voluntary 30 -50 years old

Estonia Voluntary
Table 2
Now let see what is situation in all Baltic countries. Figure 2 introduces Pension funds’ market in Baltic countries. In Baltic countries about 500000 persons have chosen Hansabank group’s pension funds.

Figure 2
We can note that in all Baltic countries from all the people who signed up contracts, even 37,76 percents have chosen Hansabank group. So Hansabank group is the leader not only in Lithuania, but also in all three Baltic countries.
So now let see how many pension accumulation contracts “Hansabank” group has in Baltic countries. The data are expressed in percents.

Figure 3
You can see that in 2002 when pension funds became to act in Latvia and Estonia these countries had 53% and 50% of all signed contracts correspondingly. Lithuanian “Hansabank” has only 43%, that is less than in Latvia and Estonia. But don’t forget that in Lithuania the change strategy is voluntarily, while in Latvia it is compulsory for persons till 30 years old.

PART 3
Consideration of pension funds
Pension reform in Lithuania is designed to achieve two major goals: to create a financially viable pension system, and to create opportunities for better retirement provision for future pensioners. Another goal of the reform is to improve institutional investment and the capital market. If well implemented and accepted by the people, the reform will have wider positive effects on society, such as an increase in individual responsibility for a person’s own future and a decrease in the political risks in the area of social security.

Pension funds can improve the savings and growth effects of the reform package, but may be difficult to implement in the short run.
Redefining the role of government. An issue related to the design of the second pillar is the role of the government as guarantor. Limited and explicit guarantees have been extended in all the countries introducing second pillars. The contingent liabilities implied are generally not quantified however. Moral hazard may also be significant. Government guarantees should be considered carefully and may be targeted to the most vulnerable, such as low income workers.
In addition, some reforms envision a more direct role for governments in the second pillar. For example, there may be an option for workers to stay in a government sponsored pension fund which competes with the private fund. Another potential role would be as a provider of annuities (as has been accepted in Sweden). Finally, the government could act as clearinghouse for records and flows of contributions for the system.
Designing the second pillar. Clearly, the role of mandatory private pension provision is limited to the savings and insurance objectives. The government is the only actor which can redistribute to the lifetime poor. Given the advantages in terms of reducing systemic risks and diversifying individual risk, what is the appropriate size of the second pillar in this system?
At least four issues arise with regard to the institutional arrangements in the second pillar. First, is the question of what type of institutions will operate as pension funds? Should these be these be employer-based or open funds chosen by individuals or some hybrid? Should the funds operate as profit-making firms or non-profit mutual societies? Should they be specialized institutions or should existing financial players be allowed to offer pension products as part of their business? What kind of minimum capital, membership size and other requirements should be placed upon them? Should government institutions be allowed to participate, for example as a competing fund manager? Finally, who should be allowed to provide benefits (annuities, scheduled withdrawals other) in the new system? All those issues have an impact on administrative costs of the system, and the more competition the higher both the costs and the benefits. Group mandates bring the costs down but limit the efficiency benefits of competition as well.
Among other things, a private pension fund system needs professional asset managers, liquid investment opportunities and a reliable banking system.
The link between the pension reform and insurance markets occurs both within the annuity portion of the old age scheme and potentially, in the area of survivors’ and disability benefits. The ability of the insurance sector to effectively provide annuity coverage in these instances could eventually prove crucial in determining the success of the pension reform. The clear implication is that reform of the insurance sector must be viewed as part of a multipillar reform and taken into consideration in the design of the scheme.
In addition to the need to focus on poverty in the short run, the low pension and wage levels found in the countries in the bottom left hand corner of the figure make it difficult to enforce consumption smoothing programs, such as fully funded pillars of the pension system. Individuals would prefer low savings rates and will actively avoid compliance with forced savings schemes (as well as other taxes). This fact is reflected in the inverse correlation that exists between informality and incomes in the region. From the point of view of the multipillar concept, it would also be problematic (but not impossible) to start a system with such low income levels given the fixed cost element in administrative charges for individual workers which could render a flexible and competitive scheme infeasible. Finally, most of the challenges for multipillar reformers listed above will be more difficult for poor countries to overcome.

CONCLUSION
• The reform of the pension system implies a gradual transition from the current pension system based on redistributive principles to a system based on savings.
• With the establishment of saving funds, each person will be able to save part of the pension in the personal account
• The pension reform will proceed without altering the nature or size of the current social contributions.
• The employers will continue to transfer the same contributions as they do now, and SODRA will transfer the necessary amount to the personal accounts in the pension saving funds.
• The key goals of the pension reform are:
1. To create the conditions for the insured persons to receive larger pensions.
2. To decrease the effect of an ageing society on the pension system.
3. To gradually decrease the rate of contributions for the pension insurance and thus lower the cost of labour force.
4. To strengthen the capital market and thus encourage the growth of Lithuanian economy.
• The pension system would entail three levels, each financed and governed in a different manner.
• I current pension financing level. This level would ensure the basic protection against poverty in the old age, or in case of an illness. It would be financed based on the currently existing principles – relying on the current contributions.
II level – saving in private pension funds and insurance companies.
III level – voluntary saving for the retirement in pension funds and insurance companies
• If a person selects to participate in the voluntary pension saving, her employer will continue to transfer the same contribution to SODRA as he / she does now. SODRA will then transfer the necessary amount to the personal account in the pension saving fund.
• During the first years of the reform, a contribution for the savings insurance would equal 2.5 percent, the same percentage that an insured person is paying at the present.
• The rate of the savings contribution would gradually increase by 1 percent annually until it reached 5.5 in the year 2007.
• In order to join the system, a person has to sign a pension savings contract with a pension fund or a life insurance company, which, in turn, will inform SODRA about that person selecting to participate in the savings enterprise
The two Lithuanian bank that have the greatest achieving in pension accumulation system use are: Hansabank and Vilnius Bank.
Such is pension program in Hansabank:
from 45 m.years 30-45 years Till 30years

Pensiion 1 – the medium investment direction. The investment value increases equally, without big swings Pension 2 – has the bigger earnings potential, but the investment’s value in fund increases not equally Pension 3 – – has the greatest earnings potential, but the value of investment can swing.
Such is Vilnius bank pension system:

According to statistical data Hansabank is a leader in Lithuania according to registered pension contracts. It takes more that 1/3 of the whole number of contracts made in 2003 year in Lithuania. The second place takes Vilnius Bank.
In all Baltic countries from all the people who signed up contracts, even 37,76 percents have chosen Hansabank group. So Hansabank group is the leader not only in Lithuania, but also in all three Baltic countries.
Pension reform in Lithuania is designed to achieve two major goals: to create a financially viable pension system, and to create opportunities for better retirement provision for future pensioners.
As very little time has passed after the pension funds had started to function, we can not say if it gives positive or negative results. But in some time it will be clear.

REFERENCES
1. www.socmi.lt
2. www.freema.lt
3. www.wne.uw.kdu.pl
4. www.vb.lt
5. www.hansa.lt
6. www.hansabanka.lv
7. www.hansa.ee

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