This publication is the private pensions component of the OECD project on insurance and private pensions in the three countries -- Lithuania, Latvia and Estonia – that border the Baltic Sea and, for that reason, are loosely grouped as the “Baltic” countries. It also follows on an earlier OECD publication on social issues that also touched upon pension reform. Labour Market and Social Policies in the Baltic Countries provides an in-depth discussion of pension policy and pension reform (Chapter III) and of the combined effect of income and social insurance contributions on those in the formal sector (Chapter II)...

This paper uses a consistent method to compare pension benefits in the Baltic states. The approach is "microeconomic", looking at individual entitlements under the reformed retirement income regimes. The pension entitlements that are modelled are those that are currently legislated. There is no attempt at determining the affordability of these entitlements. The projections of benefits for full-career workers show that these new systems are well diversified, with around half of the net replacement rate coming from the funded schemes in Estonia and Latvia and one third in Lithuania. The new systems are also broadly neutral with regard to pension age and do not encourage early retirement to the degree of many OECD countries. On the other hand, the new systems are more generous and less redistributive than all but a couple of OECD countries. The treatment of pensioners under the personal income tax is also exceptionally generous in all three countries...

This paper provides a description of the reform of the Estonian pension system with a focus on the operation of the new funded scheme. One interesting aspect of the Estonian funded scheme is that it involves centralised contribution collection, account management and record keeping. The Tax Board collects contributions while the Central Registrar for Securities houses the central database where all information on members, their choices, and transactions is gathered. The mandatory pension funds are also protected with a guarantee fund that covers losses in the event of bankruptcy of the fund manager or losses generated by violations of regulations. After one year of operation of the industry, the fund industry shows patterns that are typical in other countries that have introduced such schemes, in particular a high degree of market concentration and investment portfolios invested predominantly in bonds...

This paper highlights the main reforms that have affected the Latvian pension system since 1991. It focuses on the three-tier model approved in 1995, which led to the introduction of voluntary funded schemes in 1998 and mandatory pension funds in 2001. The reform also led to the establishment of a new first tier where benefits are financed on a PAYG basis, but are based on individual actuarial principles. This is one of the few cases in the world of the so-called notional defined contribution system. As in Estonia, contribution collection, account management and record keeping are centralised. Banks and insurance companies can be pension fund managers but have only partial information about the affiliates. Supervision is carried out by the Financial and Capital Markets Commission...

The Lithuanian pension system experienced two major reforms, one in 1995, which introduced social insurance principles, and a second one in 2000 which established a voluntary funded pension pillar. Strict regulatory measures, an unfavourable tax regime, and high social security contributions largely explain the failure to attract investors in fund management companies. After a long debate, a new law was approved in December 2002 to be implemented in January 2004. Workers will be able to choose between making their full social contribution to the PAYG tier and diverting part of it (up to 2.5% of their salary in the first year, increasing up to 5.5% in later years) to mandatory pension funds and specific life insurance contracts...

Private pension funds systems have developed at different paces, and with differentstructures, in the three Baltic states. In Estonia and Latvia, a three-pillar pension system was established. Lithuania introduced a two-pillar system without mandatory pension saving. The pension funds systems in the Baltic states are in the early stage of development and vary because of differing financial system structures in each country. The Baltic financial sectors are still less developed than the financial sectors of EU countries. Financing in the Baltics is dominated by the banking sector, which is highly concentrated and owned by international financial conglomerates. The Baltic securities sector has been stagnant, even during the recent period of growth. The regulations of the pension funds portfolios in Estonia and Lithuania reflect the situation in the financial market. In Latvia, regulations on pension funds policy reflect a government wish to keep money at home. Banks in these countries are the main power behind the development of the pension funds system. The Baltic countries will become EU members on 1 May 2004. Their future economic, financial and pension funds system will be shaped by EU legislation and the EU integration process...

A key policy goal in the three Baltic countries is to bridge the productivity gap with Western Europe. This requires increased investments into corporate innovation and efficiency enhancement. While reinvested profits and bank credit will continue to be their primary source of funds, Baltic companies will find it desirable to diversify their financing instruments. Governments in the region expect that the recently introduced mandatory pension funds will eventually play a major role in the financing of private sector growth. Following the experience of some OECD countries, private equity may be an attractive vehicle to channel pension funds money into innovative firms. To do so, government policy could act as much on the supply as on the demand side by improving information flows between investors and investees, streamlining tax policy as well as adapting relevant pension fund regulations...