Latvia should strengthen the second and third pension levels to improve pension adequacy, recommends the International Monetary Fund (IMF), which conducted a study of Latvia's pension system, writes Diena.
This would ensure adequate pensions and reduce the financial burden on the state pension system in the future. The IMF recommends Latvia to increase the share of contributions to the second level by returning the percentage point transferred to the first level, to enhance the returns of the second and third level plans, and to stimulate savings in the third level.
The third level should become the main source for providing decent pensions in the future.
Currently, this level is mainly used by households with medium and high incomes; however, the state should encourage participation in it by providing tax incentives to companies that make contributions on behalf of their employees. Another option is to automatically enroll people in third-level plans with the possibility to opt out.
"Overall, people in Latvia are quite actively participating in the third pension level, but mainly those with medium or high incomes. It is difficult to expect people with low incomes to allocate funds for savings in the third level," notes Evija Dundure, head of the insurance and pension fund supervision department at the Bank of Latvia.
According to the Bank of Latvia, it is premature to talk about introducing mandatory participation in the third level, but it needs to be made more attractive. However, the main focus should be on strengthening the second level, into which billions of euros have been invested. Moreover, mandatory participation in the third level would be an expensive and cumbersome process, as people can opt out and then rejoin.
"To introduce automatic participation in the third level, a corresponding law needs to be adopted. Then, when concluding an employment contract, a person would automatically be included in this system by default, but there is an important nuance here - it is necessary to choose the appropriate plan and pension fund, which is individual for each person. The regulations should specify which plans and based on what principles employers can choose. This would be an employer's function, and the employee would have the right to opt out. Initially, everyone would be included in the system, and then some may opt out while others may not. And here, considering the level of financial literacy of the population, we may face a situation similar to the second pension level," Dundure notes.
