But this does not mean that in the long term the investment will not have a plus sign. And if a person submits an Annual Income Declaration to the State Revenue Service (SRS), then he can recover 20% as personal income tax refund (no more than 10% of the gross income received in the relevant year, but no more than 4,000 euros per year). Since none of the investments of the 3rd level of pensions has been unprofitable by more than 20% during the year, it is not possible to say “by and large” that this investment had a minus sign.
Vanished money and hopes for a big pension
The reader of the magazine “Likums und Taisnība” Inesis Malves from Birzgale Parish shared his story about “adventures” with pension level 3: “On August 18 of last year, I had 344.12 euros saved in the 3rd level of the “Swedbank” pension “Stability”, but after a month there was only 330.41 euros. 13.71 euros disappeared or evaporated into thin air. I’m waiting to give it back. There is no shame, no honor, no conscience… Cheating, cheating, empty promises! But in the months of February and March of this year, 45.45 euros had already “flowed away”. Where did you stay? Gali in the water – money fluctuating, coming back in the long term… Wait with a bag – no news, no signs…”
Statistics show that last year the average amount of investment losses at pension level 3 was 14.63% (it could be both higher and lower, depending on the investment plan). However, over ten years the average return was 2.04%.
So, if last year the losses in the investment were 14%, but when you submit the Annual Income Declaration to the SRS, you can get 20% back from the personal income tax refund, then at this point there should be no direct losses. Only hopes for the future “big pension” are over.
Risky investments
Profit for investments in pension level 3 depends on fluctuations in world stock exchanges and share prices. (Photo: imageBROKER/Shutterstock/ Vida Press)
As pension level 3 investments are made in the securities of various countries (starting from Lithuania and Estonia, and ending with developing countries – Morocco, Mexico and Chile), as well as not only in Latvian, but also in the shares of companies and banks of other countries (such as “Latvenergo”, “Novaturas”, “Apranga”, etc.), then, to put it simply, everything depends on the “game of luck” on the stock exchange – share prices and exchange rates. Needless to say, the global economic crisis, caused first by the Covid-19 pandemic and then by Russia’s invasion of Ukraine, “drove” the prices of securities. At this time, of course, it is worth emphasizing that pension funds are not invested in racist countries or in companies related to them, as this is not allowed by the sanctions set by the European Union.
In Latvia, there are about 370,000 participants in the 3rd levels of various pensions, but significantly fewer make regular contributions to them (at least 10 euros per month). Evija Dundure, Director of the Insurance and Pension Supervision Department of the Financial Capital and Market Commission, stated at the end of last year at the European Retirement Week event that 28% of the economically active population of Latvia made contributions to pension level 3, that is, around 270,000 inhabitants. Therefore, every month Latvian residents contribute at least 2.7 million euros to the 3rd level of pension, which are currently invested in non-profitable funds.
The data of the asset management and life insurance group “Invalda INVL” show that in February of this year, investments in the 3rd level of pensions had a loss of between 0.66% and 3.96% (depending on the investment plan). In any case, investing in securities was risky last year. For example, German debt securities fall by as much as 20 percent or more during the year.
So far no profit
In order to avoid surprises, it is worth checking and evaluating your savings at pension level 3 from time to time. (Photo: Ieva Leiniša/LETA)
The review of Pension Funds of the Association of Latvian Banks for the year 2022 shows that last year none of the 14 pension level 3 plans included in it brought a profit. This also applies to the “Swedbank” plan “Stability 25+”, whose “yield” last year was minus 13 ,48%. Although in the last ten years its profit was with a plus sign, but relatively very small – only 0.99%, at a time when other, riskier, plans had a yield of almost four percent.
Meanwhile, the international central securities depository service provider – the company “Nasdaq CSD SE” writes on its website manapensija.lv:
“Level 3 of the pension system is an opportunity for you to voluntarily make additional savings for your pension. You, individually or through your employer, can voluntarily invest part of your income in one of the private pension funds. It is an opportunity to take care of your old age by making regular contributions over a long period of time. The savings built up over time will serve as a supplement to the state-guaranteed pension.
The Private Voluntary Pension Scheme, or Pension Tier 3, started operating in July 1998 and allows you to voluntarily build up additional savings for your state-guaranteed Pension Tier 1 and Tier 2 pensions. The amount of money that you and/or your employer regularly contribute to the pension fund is invested in various securities, and depending on the chosen investment strategy, the general situation in the financial markets, as well as the activities of the asset manager, ensures an adequate return on investment.”
The myth of loss
Anželika Dobrovolska, manager of investment and pension products at Luminor Bank: “In the long term, investments in pension funds are capable of providing really attractive results.” (Photo: Ieva Čikas/LETA)
Anželika Dobrovoļska, manager of investment and pension products of Luminor Bank, Jauns.lv refuted the myth that there is a risk of losing money when saving in a pension fund:
“Just as in any investment portfolio, the money paid into the 3rd level of pensions is widely diversified among different asset classes, regions, sectors and companies (management of the 3rd level of pensions is carried out by commercial banks – red.). In addition, all pension managers are supervised by the Financial and Capital Market Commission, which monitors that the managers take care of citizens’ savings. Of course, there are dips in the financial markets, but there is no need to worry too much about them, as fluctuations in the stock markets are a normal phenomenon. Managers of active pension funds regularly monitor market trends and make the necessary decisions to adjust the portfolio to the market situation. At least once a year, the pension fund prepares and sends the client a full report on the profitability of the savings at pension level 3, and it is possible to change your pension manager at any time.”
How does the 3rd pension level work?
The expert recommends using reduced asset prices to your advantage in case of market declines by making additional investments and acquiring more instruments or fund shares. In order to understand which type of investment is the most suitable, it is recommended to contact financial advisors (for example, at your bank), who will help you understand the financial market, so that you do not make hasty decisions out of fear of market fluctuations.
“In the long term, investments in pension funds are capable of providing really attractive results,” says Anželika Dobrovolska.
Is it possible to “get rid” of the 3rd level of pensions?
Bankers and financial experts urge you not to be afraid of investments in the 3rd level of pensions. (Photo: Paula Churkste/LETA)
A member of pension level 3 can change the investment manager (change the investment plan within his bank or switch to another bank), as well as, upon reaching the age of 55, withdraw from pension level 3 altogether and receive back the money invested in it either all at once or in installments parts. The Bank of Latvia informs:
“A member of pension level 3 can transfer his accumulated capital to another pension plan in the same or another pension fund by submitting an appropriate application and indicating to which pension plan the capital should be transferred. Before that, the participant must conclude a membership agreement for participation in the selected pension plan, so that the pension fund can make a transfer to the participant’s individual account in this plan”.
“Swedbank” explains: “If you are not satisfied with the operation of the chosen pension fund, you have the right to transfer the accumulated pension capital to another pension fund. When reaching the age of 55, withdraw it immediately or in parts. In order to receive the accumulated supplementary pension capital, you must fill out an application in the “Swedbank” internet bank or in any “Swedbank” branch. Additional pension capital is paid out within ten working days.”
The same applies to other commercial banks that manage pension level 3 – if the client wants to change the investment plan, stop participating in it or transfer it to another bank, he should contact the bank that manages it.
