Second pillar pension funds: smaller fees and revised investment strategies
Changes to the management of the second pillar pension funds from the beginning of the year: in the next three years asset management fees of pension funds will be gradually reduced to 0.5%, while all funds of the participants will have to be invested only in the life-cycle funds. These changes are related with the pension accumulation system reform.
‘Smaller fees and a direct link between the participants’ age and their investment risk will allow for the second pillar pension funds to achieve optimum investment results. It should be noted that those residents that already are participants of pension funds are not required to do anything additionally – until 1 July 2019 their funds will be transferred to the new life-cycle funds’, said Justina Pupienienė, Head of the Long-term Saving and Investment Product Supervision Division at the Bank of Lithuania.
From 2019 asset management fees applied by pension accumulation companies will become smaller. This year, they will have to account for no more than 0.8% of pension savings in the account, in 2020 – no more than 0.65%, and from 2021 – no more than 0.5%. By 2021, the asset management fees applied by pension funds will be halved.
For example, if the resident has accumulated €5,000 in the second pillar pension fund, then last year his annual asset management fee stood at €50, this year it will stand at €40, and in 2021 – at only €25.
When total assets of all the pension accumulation company’s managed funds will account for €2.5 billion, the asset management fee will not exceed 0.4%. At this time, there is no such company among the pension fund managers – the company with the largest pension fund assets manages about €1.2 billion in pension assets.
Life-cycle investment, i.e. when investment risk of the fund is reduced over time, becoming a default option in the second pension pillar constitutes another important change. All five second pillar pension fund managers had to establish seven life-cycle funds for persons born within the periods of 1954-1960, 1961-1967, 1968-1974, 1975-1981, 1982-1988, 1989-1995 and 1996-2002. Funds of all pension accumulation participants will be automatically transferred to the funds with the year of birth of the participant in their title. The transfer will have to be completed until 1 July 2019.
The pension fund will become more conservative as the participant ages, i.e. with retirement age approaching, the investment risk of the fund will be gradually reduced. Every participant will be able to accumulate in the same fund throughout the whole accumulation period, there will be no need to decide what fund to choose based on its level of risk and when to switch funds – the investment risk will be decreased automatically with regard to the age of the participant.
The pension fund participants will retain the possibility to change their pension fund manager.
From January 2019 the amounts of contributions to second pillar pension funds and their payment procedures are changing as well. For more information on pension accumulation as of 2019, see www.sodra.lt.