The funded pension scheme or Second pillar pension is a state-introduced system that defines social tax payments procedures, administration of assets formed by social tax contributions as well as pension benefits pay-outs order. While the total amount of social tax transferred for old-age pensions remains unchanged, the funded scheme provides an opportunity to increase your pension capital.

Every resident of Latvia born in the period from 02.07.1951 till 02.07.1971 has a right to join the second pillar pensions. Those born after 01.07.1971 become members of the funded pension scheme automatically. 

1st pillar pension Your social tax payments are channeled to cover pension pay-outs to current pensioners. In the framework of this system information on the amount of social insurance payments made to each individual pension account is being registered, however, no real funds are being accumulated on those accounts. The 1st pillar pension capital is indexed annually, at the rate determined on the basis of average salary growth in the country. Your social insurance payments 2nd pillar pension All the social insurance payments contributed by you shall only be used for your own pension pay-outs in the future. Real money is accumulated on your pension account. The 2nd pillar pension provides for growth of your social tax contributions at the rate dependent on the investments return.

Participation in the 2nd pillar pension does not imply any additional social insurance contributions!

Joining the 2nd pillar pension grants everyone an opportunity to provide for a higher old-age pension. The reason is the fact that under this system a certain part of the social tax contributions allotted to pension capital accumulation is invested in the financial and capital markets - into stocks, bonds and other securities, as well as real estate and bank deposits, which allows the funds invested to grow in value faster. This process is managed by investment companies, IJSC “BALTIKUMS ASSET MANAGEMENT” among others. Experience shows that long-term investment returns on average exceed the inflation rate and the average salary growth rate.

Rights of investment plans members

The right to transfer the funded pension capital to a different asset manager

Each person that has joined the 2nd pillar (i.e. funded) pension and has therefore chosen an asset manager and an investment plan for its pension capital effectively becomes a member of the corresponding investment plan. One has the freedom to choose and, in accordance with the regulations accepted by the Cabinet of Ministers, change the asset manager and/or investment plan for the 2nd pillar pension capital. Those may be changed no more than once a year.

The right to obtain information

Each pension plan member has the right to receive information on the Investment plan, Custodian Bank and Asset manager, as provided for in the LR legislation. The information shall be granted by the Agency and its assignees, IJSC “Baltikums Asset Management”. Internet address: http://www.asset.baltikums.lv/ 

Right to receive pension capital when applying for the old-age pension

When the funded pension scheme participant having reached the age allowing her/him to apply for the old-age pension, does so, the Agency treats the accumulated funded scheme pension capital in one of the two ways, according to the participant's decision:

• the pension capital accumulated in the funded scheme is transferred to the special state pension budget to be in full appended to the pension capital formed in accordance with the law "On state pensions"; the total sum of the pension capital is then used for the old-age pension calculation as stipulated for in the above-mentioned law;
• the pension capital accumulated in the funded scheme is transferred to the insurance company specified by the participant, IJSC "Baltikums Dzîvîba", among others, in payment for the life insurance policy. The standardized regulations for the relevant life insurance programs shall be issued by the Cabinet of Ministers.

In case the funded pension scheme participant passes away before applying for the old-age pension, the whole pension capital accumulated in the funded pensions framework shall be transferred to the state pension special budget and taken into account in calculation of the breadwinner loss pension paid out to his family members as stipulated for in the law "On state pensions".

If the 2nd pillar pension system participant passes away before applying for the old-age pension, both the accumulated pension capital and the profit derived from capital investments in the framework of the pension plan chosen shall be taken into account in calculation of the breadwinner loss pension paid out to his family members. It is not possible to directly inherit the 1st and 2nd pillar pension capital.

Who makes the contributions to the 2nd pillar pension account and how are those made?

If either you yourself make the social insurance contributions (social tax payments) or your employer makes those on your behalf, then you are a socially insured person. This implies that you participate in the state pension insurance system. Upon receiving information on your social insurance contributions, the SCIA (VSAA) registers those in your individual 2nd pillar pension account and transfers to your previously chosen investment plan.

When the relevant contribution amount has been registered in your account, this sum is within 5 days transferred to the chosen investment plan asset manager's account with the custodian bank. The investment plan assets are defined in terms of investment plan shares.

The value of each investment plan single share at the start of the plan operation is equal to 1 Lat. Further on this value changes in accordance with the investment plan operation results. One can calculate the value of the individual's accumulated funded pension capital on the basis of the investment plan share value on a specific date.

The accumulated funded pension capital amount shall depend on:

• the salary social insurance contributions are made of,
• the rate of social insurance contributions allotted to the 2nd pillar pension as defined in the legislation,
• return on investments by the chosen asset manager in the framework of the relevant investment plan;
• the length of time period before one applies for the old-age pension.

The material above was constructed on the basis of the IJSC “Baltikums Asset Management”and http://www.manapensija.lv/ data.