PensionsEurope Calls for a Halt to the Proposed Changes to the Lithuanian Pension System
Brussels, 11 February 2025. PensionsEurope calls for the Lithuanian government to reconsider its proposed pension reforms, warning that they would severely undermine the country’s retirement system. The proposed changes to the 2nd pillar pension scheme—including the replacement of automatic enrolment with voluntary participation, the abolition of the state’s matching contribution in favor of a personal income tax deduction, and the introduction of a 12-months opt-out period—risk significantly weakening retirement security and undermining pension adequacy for Lithuanian citizens.
Proposals do not align with the European Commission‘s 2024-2029 Agenda
Developing funded pensions across the EU is one of the key priorities of the European Commission and crucial in developing the European Savings and Investments Union. Lithuania should take pride in the results the present system has achieved and continue to develop pension funding for the benefit of its citizens and the Lithuanian economy. The Draghi Report also highlights the importance of strengthening European capital markets to drive economic growth, enhance resilience, and support long-term investments, and stresses the key role of pension funds in achieving these goals.
In addition, the Lithuanian Ministry of Social Affairs has secured support from the European Commission’s DG REFORM for the project “Technical Support in Transforming the Existing Fully State-Administered Funded Pension Scheme.” This initiative brings together high-level pension experts to provide guidance on the modernization and sustainability of the country’s pension system. As the recommendations from the European Commission’s experts are still forthcoming, we call for the Lithuanian government to await their insights before implementing any changes to the current pension framework.
Auto-Enrolment: A Proven Tool for Increasing Pension Coverage
Auto-enrolment is widely recognized as one of the most effective mechanisms to boost pension participation and is actively promoted by the European Union and the OECD. In the UK, for example, over 11 million people have been enrolled in workplace pensions since its introduction in 2012. Ireland is in the process of introducing auto-enrolment as voluntary pensions have not achieved adequate coverage.
Lithuania’s 2019 auto-enrolment reform has delivered excellent results, with over 70% of the workforce joining the 2nd pillar system. Removing this mechanism to adopt a voluntary model would likely cause participation rates to decline rapidly, leaving many individuals with significantly lower retirement savings and increasing the risk of old-age poverty.
Undermining the Multi-Pillar System
The proposed reforms go beyond dismantling auto-enrolment. The proposed abolition of the 1.5% state matching contribution and its replacement with a tax refund mechanism will drastically reduce incentives to save, disproportionately impacting lower- and middle-income earners.
For years, international organizations, including the World Bank and the OECD, have emphasized the importance of the multi-pillar approach to improving retirement. These models consistently outperform those relying mainly on the first pillar.
By weakening the 2nd pillar, the proposed changes would place even greater pressure on the already strained public pensions. This is particularly alarming given that in 2022, 41.4% of Lithuanian citizens aged 65 and older were already at risk of poverty—more than double the EU average. Ignoring this reality, but also the country’s long-term demographic issues, including an aging and shrinking population, will only deepen the pension crisis in the years ahead.
Long-Term Impacts on Pension Adequacy
Introducing a 12-month “opt-out window” allowing individuals to withdraw their accumulated funds from the 2nd pillar poses a serious threat to future pension adequacy. With a net pension replacement rate of 28.9% in 2022, Lithuania is facing already challenges in providing adequate retirement income.
Recent projections by the European Commission underscore the importance of maintaining and expanding the statutory-funded pension scheme. The gross replacement rate for this scheme could increase from 2.8% for men and 2.7% for women to 10.5% for both genders as the system matures. This demonstrates the vital role the 2nd pillar will play in improving Lithuania’s overall replacement rate and achieving better pension adequacy.
PensionsEurope Urges Reconsideration
PensionsEurope calls on the Lithuanian government to reconsider these proposed changes and pursue measures that strengthen, rather than dismantle, the country’s pension system. A robust pension system, with a strong funded component, is key for delivering adequate and sustainable pensions.
The statutory-funded pension scheme in Lithuania is still in its infancy and will require time to mature and deliver its full benefits. Targeted measures should be adopted to enhance its effectiveness. These include public education campaigns on the importance of the statutory-funded pension scheme and incentivizing employers’ contributions to the 2nd pillar. Such actions are important to building a better pension system and improving the retirement future of Lithuanian citizens for generations to come.
For more information, please contact us at info@pensionseurope.eu.
