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Article | Global News Briefs

Lithuania: Reforms of pension reforms past

By Leonie Spackman | February 26, 2025

In a marked reversal, Lithuania is seeking to make contributing to second-pillar defined contribution retirement accounts voluntary once again, along with proposing new tax incentives for employers.
Retirement|Ukupne nagrade |Health and Benefits
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Employer Action Code: Monitor

The government has announced several proposals that would affect employee retirement savings. The most controversial measure would make enrollment in the second-pillar defined contribution (DC) pension system voluntary once again, reversing 2019 reforms that established automatic enrollment of employees under age 40. A separate proposal already approved by Parliament would abolish, over time, tax incentives for employee contributions to voluntary third-pillar retirement accounts.

Key details

Proposed second-pillar DC account reforms include the following:

  • Auto-enrollment of employees would be abolished; enrollment would be fully voluntary. Currently, continued participation is irrevocable for individuals who do not opt out within six months of enrollment. Under the proposals, all current participants would have a one-year window to cease participation and close their accounts, with the option of withdrawing their own past contributions plus investment returns or crediting the value to increase their first-pillar defined benefit (DB) pension entitlement. Accrued state contributions could only be used to increase the first-pillar DB pension entitlement
  • Participants would have the option to contribute at a rate higher than the base 3% of covered pay and would have greater flexibility to suspend contributions temporarily. Employers would be eligible for tax incentives for contributing to the accounts; currently, employers do not contribute. Matching state contributions to second-pillar individual accounts would be abolished. Instead, employee contributions would be tax-deductible up to the current state contribution ceiling (365 euros per year)
  • Plan members would be able to access funds prior to normal retirement age (NRA) in a variety of situations, such as withdrawing a quarter of the account balance once at any point prior to NRA or withdrawing the full balance within five years of NRA if the value is below a given threshold. Full withdrawals would be allowed at any age under certain conditions (such as permanent disability)

Regarding the third-pillar voluntary personal DC system, under separate legislation awaiting the president's signature, tax relief for contributions to accounts established after 2024 would be abolished, while tax relief for accounts established before 2025 would continue through 2034.

Employer implications

The pension system, established in 2004, is based on a first-pillar DB pension, comprising flat-rate and earnings-related points-based benefits, complemented by occupational second-pillar DC accounts and personal third-pillar DC accounts, both managed by private providers. Rates of compulsory contributions to the second pillar (initially diverted from first-pillar contributions) changed often in the first 10 years for various reasons. In 2014, second-pillar enrollment became voluntary, only to be made compulsory again in 2019 for workers under age 40, with the possibility to opt out. At issue throughout the evolution of the system has been the adequacy of second-pillar plans weighed against lower funding (and benefits) for the first pillar as well as the cost of state subsidies. According to the government, the latest reforms would provide more individual freedom to save for retirement, supported by new tax incentives and ideally employer contributions. Critics of the reforms argue that they would undermine the level of private savings for retirement. Only 19% of employers surveyed by WTW in 2024 provide supplemental retirement benefits for employees, but that is up markedly from 2% in 2019. The introduction of new tax incentives for employers, if approved, may make providing retirement benefits more attractive for companies.

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