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Monday 22.01.2018 | Name days: Austris
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Expert: pension capital grows, but the Latvia still has a ways to go

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU«Latvia’s pension system has been named one of the best in the world multiple times. Pension capital in it has grown rapidly over the years. The volume of savings gathered on the 2nd level pension system by the end of Q1 2017 came close to EUR 3 billion. The volume saved on the 3rd level pension system was close to EUR 4 billion,» explains Nordea Pensions Latvia board member Ilja Arefjevs.

Nevertheless, he emphasizes that in spite of the impressive numbers, the picture is completely different when it comes to calculating pension savings per capita – EUR 2,287 in the 2nd level pension system and EUR 1,420 in the 3rd level pension system.

Pension savings and GDP

There are different methods to help assess the pension volume the country needs. Pension capital is very individual because it depends on personal financial situation. Still, it is relatively simple to calculate, says Arefjevs.

«According to data from OECD, pension savings in the European Union range between 90 and 100% from countries’ GDP. However, it is important to keep in mind that the EU consists of old, wealthy countries and relative newcomers. For example, pension savings reach 150% of GDP in Netherlands and 100% of GDP in the UK. In many other countries, on the other hand, this index is significantly lower,» the expert continues.

Pension savings growth potential – more than seven times

Arefjevs notes that Latvia’s GDP is EUR 25 billion. Nearing the average EU level means pension savings should reach EUR 25 billion (savings on 2nd and 3rd level pension systems were only EUR 3.3 billion in Q1 2017) at current prices. On average, this means EUR 20,000 per pension system participant. The largest portion of this amount applies to 2nd level pension system, considering the 6% rate from gross wages and the large number of participants – 1.3 million people.

Large number of small wage recipients and grey economy are at the core of disproportion

«Without a doubt – rapid development and capital formation in Latvia requires time. But the lack of time is not the only obstacle. For example, Estonia’s 2nd level pension system has around 700,000 participants. Their total volume of savings is EUR 3.3 billion. This means around EUR 4,800 per capita, which is more than twice the amount when compared with Latvia. As we all know, average wage in Estonia is not twice as large in comparison with Latvia,» says Nordea Pensions Latvia board member.

It should also be said that payments to the 2nd level pension system were higher for some time in Estonia. But the difference between 2nd level pension systems in Latvia and Estonia is present mainly because Estonia does not have such a large number of minimal wage recipients as Latvia.

The hardest part is over

«Last year’s summer was the moment when the number of 2nd level pension participants whose savings ranged between one and five thousand euros was higher than the number of clients whose pension savings were below one thousand euros. Of course, this accomplishment is purely symbolic, because pension capital under five thousand euros is not considered sufficient. Still, it can be considered a positive tendency, one that is expected to remain in the future. It should be noted that the number of clients whose 2nd level pension savings exceed five thousand euros and less than ten thousand euros continues growing rapidly. There are now more than one hundred thousand such clients,» says the expert.

Ref: 224.109.109.6093


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