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Friday 22.02.2019 | Name days: Rigonda, Adrians, Ārija

Study: young residents have low interest in pension savings

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe majority of economically active residents (73%) aged 18 to 39 are interested in knowing the size of their future pension. At the same time, 70% of them do not know their current amount of pension savings.

46% of respondents do not know or are not certain who their pension manager is, according to results of a study performed by Citadele Bank’s subsidiary CBL Asset Management and Norstat.

«Study’s results point to several interesting and worrying trends. We see that economically active residents aged up to 39 want to know the size of their future pension. At the same time, a relatively small number of them have switched from interest to action. Unfortunately, the reality is that most don’t know about the size of their pension savings or which pension manager is in charge of it. With that, the point of a three-level pension system, which provides for people to monitor their savings, profitability of their chosen pension plan or change their chosen pension manager or pension plan, is lost. People rarely use the opportunities provided by the state pension system. Without knowing pension savings people are at risk of falling into illusions,» says CBL Asset Management board chairman Kārlis Purgailis.

The higher their income, the better informed people are

Survey data shows that the level of awareness of residents aged 18 to 39 in 2018 has declined in comparison to 2011. 62% of residents of this age group knew for certain who was in charge of their 2nd level pension in 2011. Now, however, only 58% of residents know for certain who manages their pension. There is a notable trend – the higher their income, the more people are informed of pension matters. Data shows that residents whose income is EUR 750 a month after taxes rarely know their 2nd level pension manager (37% to 49% of residents, depending on income). Residents whose monthly income is above EUR 751, on the other hand, are generally better informed of their pension manager (60% to 70% of them know for certain).

The younger they are the less informed they are

Study results also show that the level of awareness regarding pension affairs for residents aged 18 to 24 is below that of residents aged 25 to 39. Only 31% of residents aged 18 to 24 know their pension manager. 45% of residents aged 25 to 29 and 59% of residents aged 30 to 34 are well-informed of their pension situation. 66% of residents aged 35 to 39 know who manages their pension.

«Latvia’s pension system states that residents when starting work, especially in their youth, should pick the manager of their pension and the pension plan to start diverting funds to their future pension. This is intended to keep residents informed of their pension as far back in their youth when they start working. However, data shows that young people are not all that interested in pension affairs. More often than not they decide to leave it to the state. However, in order to form sufficient pension savings in advance, it is important to keep up with the chosen pension plan early in life,» said Purgailis.

The trend when most young residents do not actively follow their pension plan is demonstrated by the fact that 49% of residents aged 18 to 39 plan to rely on state retirement pension. 34% of respondents said they plan to continue working after reaching retirement age; 32% plan to keep their pension on their bank account. Only 20% of respondents said they use 3rd level pension plan. 16% of respondents said they will lease or sell property to finance their retirement. 13% of respondents mentioned having no thoughts of their retirement. 10% plan to rely on friends and relatives. 9% believe they will not live long enough to retire.

Most residents do not understand the function of the pension system

«Young people’s passiveness when it comes to pension affairs can be explained with the fact that most do not understand the function of the pension system. Survey results also point to a worrying trend – 61% of respondents have said they do not understand the function of the pension system. People do not understand that only 1st and 2nd pension level secures no more than half of residents’ pre-pension level. It is necessary to form savings on 3rd level pension level or other kinds of savings. 60% of respondents either don’t know or have wrong information in regards to the way it is possible to determine their 2nd level savings. 76% of respondents either don’t know or have wrong information on the way it is possible to change their 2nd level pension manager,» said Purgailis.

He says society has several stereotypes in regards to pension. «First of all, young people believe pension is somewhere far away in the future and that there is no need to think about it now. This is wrong. The period when we first start working is the best time to look at pension offers and entrusting our pension to managers, because this way offers the best chance of increasing future savings. Secondly, people believe pension savings are too small to be of any interest. It is worth mentioning here that economically active residents aged 35 have an average of 4,000 to 6,000 euro on their 2nd level pension plan. Is it not an amount worth keeping an eye on? Additionally, depending on the pension manager and pension plan, future pensions could differ by a couple of dozen euros a month.»

Solution – more active provision of information to residents

Three directions were outlined in discussions regarding ways of improving residents’ level of awareness.

Andris Saulītis, Dr. Soc. of European University Institute (Florence, Italy), studies residents’ financial behaviour. He said that it is the country’s responsibility to take care of residents and their retirement. «First of all, the state has a duty to remind us every now and then that the activities of our 2nd level pension managers should be reviewed form time to time. Currently the sate asks everyone only once in a lifetime who they would entrust their 2nd level pension management. The state should ask us about that more often – every ten years, for example. Secondly, Latvian residents have critically low household savings. One of the options not used by the state is motivating residents to not waste income gained from recovered taxes. The state should form a mechanism for residents to divert that money to their pension savings more conveniently. One of the ways to secure this option is putting this section in income declarations.»

He says that «different countries use many different ways to encourage residents to save more money, spend less and think more about the future. Latvian state has all the opportunities to encourage residents to be smarter in regards to their pension.»

Welfare Minister’s deputy state secretary Jana Muižniece said that it is planned to expand portal and increase cooperation with State Revenue Service to make information regarding pension savings more accessible to residents.

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