Participation in the state funded pension scheme or 2nd pillar pension is mandatory for all those born after 1 July 1971. If you are an employed person or receive another remuneration for which mandatory state social insurance contributions are paid, you will automatically become a member of the 2nd pillar pension.

The first investment plan of the 2nd pension pillar accruals for the people who have just started their careers and social insurance contributions is chosen by the State Social Insurance Agency by random draw. The new member of the investment plan is given two months to inform about the desire to change their investment plan before the contributions are being forwarded to the investment plan. If it is not being done, then the contributions are being forwarded to the 2nd pension pillar investment plan chosen by the SSIA.

Currently, in the register of the state funded pension scheme fund managers there are seven managers of 2nd pension pillar funds registered. Each of them has one or more investments plans, in total amounting to more than 25 options. How to not get lost in the variety of offers and what criteria to take into account upon choosing the best one for you?

We have compiled the most important criteria that will help you to make a smart choice.

1. Type of the pension plan

There are three types of 2nd pillar pension plans: active, balanced and conservative. The main difference between them is what share of the pension plan assets is invested in stock market. The more exposure to stock market, the higher the potential yield, but it is also a higher risk due to low chance of prediction of fluctuations in financial markets.

The less the manager invests in stock market and more in the government and corporate bonds, promissory notes, deposits with credit institutions and other similar financial instruments that ensure a predictable yield, the lower the risk, but also the lower the yield.

• Active plans. In these plans, the share of stock market investments can amount to 50% – 100% of the pension capital, which can provide higher yields, but is riskier. However, young people should not be afraid to choose riskier pension plans, as over time fluctuations in the value of the investment are likely to level off and higher returns on these plans will help to accumulate more pension capital in the long-term perspective.
• Balanced plans. In order to balance volatility and possible profits, the share of stock market investments in balanced plans is up to 25%, thus reducing the risk and ensuring medium yield. Balanced investment plans may be suitable for people who have more than 10 years left until retirement, as it is advisable to choose a plan with a lower risk during this period. The balanced plan will be the middle ground between the investment plans with higher risk as in active plans and low-risk investment strategy as in conservative plans, which is usually chosen at pre-retirement age.
• Conservative plans. A conservative investment strategy is appropriate, if safe and stable, albeit small capital gains, are important to you. In this case, the manager invests all funds in international financial instruments with a fixed yield – in government and corporate bonds, promissory notes, deposits with credit institutions and other similar types of investments. Usually, conservative plan is chosen by people with less than 10 years left until retirement, and they do not want to take unnecessary risks, because they need to focus on maintaining their pension capital with minimal fluctuations, rather than aiming at high yields.

To sum up, it is easier to choose the most suitable type of 2nd pillar pension plan based on your age and how many years are left until the retirement pension. Younger people often choose an active plan, that allows them to accumulate more capital through higher yields, while older people prefer a pension plan with a lower risk, since at this age the most important thing is to maintain what is already accumulated, with less focus on higher profits.

Once one of the three types of the pension plans is chosen, it is time to compare the plans offered by different managers in order to assess which one would provide the best return-risk ratio.

2. Capital gains of the pension plan

One of the criteria to pay attention to when comparing different plans is the increase in the value of the plan. It should be understood here that the assets of each 2nd pillar pension plan are divided into many small units with a value assigned to one unit. The value of one unit of a pension plan can be, for example, 1.5 EUR, and another – 2 EUR. Accordingly, by changing the pension plan to another, with a smaller value per unit, your savings will be divided into a larger number of units of the new pension plan, although it does not change the total amount of the accumulated capital does at all.

The value of the unit does not mean anything, the most important indicator here is the percentage increase in value, which you can check on the portal manapensija.lv. Here you will see both the current and historical comparative data on previous periods, as well as you will be able to compare them with the performance of similar plans. However, note that your pension plan savings are invested in financial instruments, the value of which changes daily, therefore the value of the pension plan units and the total savings also grows or decreases every day in response not only to your contributions, but also to market fluctuations. The long-term profitability of the pension plan is more important.

3. Long-term profitability

The amount of your pension savings will always depend on three main variables: the amount of the contributions, how long the savings have been built and how profitable it has been in the long term thanks to successful investments made by the manager. The more money you put into the savings, the more likely it is to return higher profits. If the investment is small, the return achieved with high long-term yields will also be relatively small. And vice versa.

Regarding the long-term profitability indicators, it is worth paying attention to comparing how successfully various 2nd pillar pension managers have worked so far. For example, Signet Active Plan has shown the highest yield in 2019 and 2020 among the similar strategy plans.

Yet one should keep in mind that the historical profitability does not guarantee the future profitability, as it is influenced both by the changes in the pension plan investment portfolio and by the events in financial markets. The current profitability data of different pension plans can be easily compared here. Pay attention to the periods when there has been a greater drop in the financial system, as well as the situation after crises, because the performance of pension plans should be evaluated in the long-term perspective.

4. Commission fee

Another factor worth paying attention to is the commission applied by the fund manager. The higher the fee, the bigger part of your funds you will have to pay to the manager. The commissions are divided into fixed and floating. The fixed commission is withheld regardless of the performance of pension plans, while the floating commission is withheld only if the profitability is positive and exceeds the result of certain indices.

For example, Signet Active Plan's management incurs a fixed commission of 0.6% of the average value of the investment plan assets. This includes compensation for the fund manager and the asset holder. The variable portion of compensation is not applied to the fund manager, thus aligning the interests of Signet managers with the long-term growth of investment values for plan participants.

5. The experience of the manager

Find out who the pension plan manager is and in what mutual funds they invest. A manager with many years of experience has gone through financial crisis periods, and has had the opportunity to learn to respond to and resolve various crisis situations. Geographical distribution of the investments is also important. If a fund manager diversifies investments in different sectors and regions of the world, they can reduce the risks in times of financial market turmoil.

For example, Signet Pensiju Pārvalde IPAS has been managing various mutual funds for more than 15 years, ensuring a wide diversification of investments – geographically, by sector and by asset classes. In addition, the investments are made not only in prospective international companies, but also in the local companies, thus the participants of Signet Active Plan not only increase their pension by earning from the growth of these companies, but also support the growth of Latvian economy.

You can find out which asset manager is managing your 2nd pension pillar capital by going to www.latvija.lv and opening page “SSIA Information and Services”. If you want to change your asset manager, select the online service“Selection or change of the investment plan for 2nd pension pillar”.