Employer contributions to a 3rd pillar pension fund would motivate a full 50% of people in Lithuania, and this type of added benefit would be valued most by those who earn most and are most highly educated. That was shown by a representative survey of Lithuanian residents conducted for INVL Asset Management, one of the country’s leading asset management companies, by Spinter Tyrimai in February 2018. Among respondents, 26% could not say whether such an incentive would be relevant for them, while 24% said it would not motivate them.
A chance for employers to encourage employees
“The survey’s shows that a full half of people in the country would value contributions by their employer to a 3rd pillar pension fund as an incentivising benefit. That means a large proportion of people not only feel the need to get adequate compensation today, but are also thinking about the future when, after retiring, they’ll need sufficient income to live with dignity,” said Dr Dalia Kolmatsui, Head of Pension Funds & Retail at INVL Asset Management.
In her view, 3rd pillar pension funds are without a doubt an opportunity for employers to make use of additional incentives to attract employees and increase their loyalty. “This form of motivation not only makes long-term incentives possible, since a contribution transferred to a pension fund adds to the supplementary pension that an employee is accumulating, but is also a practical way for companies to motivate employees,” Dr Kolmatsui said.
Calculations show that, allocating the same amount of money for an employee incentive and considering all the costs, a pension fund contribution can be as much as 70% bigger than the after-tax amount of a bonus that is paid. That is because a pension contribution, unlike a salary bonus, is not taxed as long as it does not exceed a quarter of the employee’s before-tax salary for the year.
“For an employee, it’s a fundamental difference, since contributing to a pension fund lets an employer allocate a much bigger incentive amount in terms of what they add to the employee’s supplementary pension accumulation,” Dr Kolmatsui said. Some companies in Lithuania already use this type of incentive, concerning themselves not just for their employees’ today, but also for their future. That includes not only international companies, but also local ones.
Most valued by people aged 26 to 36 who have a higher education
More than half of respondents aged 18 to 55 said contributions to 3rd pillar pension funds are an incentive that would motivate them. The largest proportion of survey participants who answered positively – 54.5% – was in the age group 26 to 35. The least – 42.5% – would be motivated among those age 56 and older.
Groups with the highest levels of education and the biggest incomes were positive more often about employer contributions to 3rd pillar pension funds. Such contributions would motivate 55.9% of people with a higher education, 48.5% of those with a secondary education, and 35.7% of those with incomplete secondary education.
In terms of income groups, 41% of those earning 300 euros a month or less said such contributions would be an incentive, compared to 54% of those earning 301-500 euros, and 66% of those who earn more than 500 euros.
“It’s great that a rather big number of young people are thinking about the future. What’s also become clear is that mid-level employees most appreciate the added value that’s created by such an incentive, while top managers can probably count on enough income to take care of saving for retirement on their own and so getting that from their employer isn’t so relevant for them,” said Dr Kolmatsui.
According to the survey, in terms of employee categories, pension fund contributions would most motivate small business people (59%), specialised professionals (56%) and manual and technical workers (54%), and somewhat less – top and middle-level managers (39%).
Accumulation is possible in any number of 3rd pillar pension funds
Under the existing pension accumulation system, all residents of the country can accumulate in 3rd pillar pension funds regardless of whether they accumulate in the 2nd pillar or have insured income. There are no limits for this pillar on the number of either pension funds or accumulation companies, and it is the individual who decides on the size, frequency and periodicity of contributions and the number of chosen funds. Accumulation in 3rd pillar funds is recommended in order to approach 80% of one’s previous income level during retirement, assuming accumulation in the 2nd pillar also.
When an employer transfers contributions to an employee’s chosen 3rd pillar pension fund and the contributions do not exceed 25% of the employee’s annual employment income, the employer is not required to pay the social security tax on that amount (31.18%) and the employee does not have to pay personal income tax (15%) or health and pension social insurance contributions (which total 9%).
“This tax effect, relative for example to an incentive in the form of a salary bonus, can be taken advantage of by additionally contributing to employees’ opportunities to accumulate more for retirement. On the other hand, it’s important for employees to understand that this is a long-term incentive, so the money that’s transferred is intended to be accumulated for retirement and withdrawn after reaching retirement age,” Dr Kolmatsui said.
If money is withdrawn from a 3rd pillar pension fund sooner than 5 years after the start of accumulation and before reaching the designated age, a 15% personal income tax applies. There are also fees that apply for accumulating in pension funds.
INVL Asset Management operates four 2nd pillar and five 3rd pillar pension funds which make it possible to choose in which fund to accumulate based on one’s age and the recommendable level of risk. As of the end of 2017, a total of 133 000 participants were accumulating in them. INVL Asset Management is part of the Invalda INVL group whose companies manage pension and mutual funds, alternative investments, private equity assets, investment portfolios and other financial instruments. Over 190 000 clients in Lithuania and Latvia and international investors have entrusted the group’s companies with more than 600 million euros of assets.
INVL and Šiaulių bankas merged their retail services as of 1 December 2023.
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INVL and Šiaulių bankas merged their retail services as of 1 December 2023.