Country Profiles

Latvia

Country Profiles

Latvia

Complementary pensions (Voluntary)

Updated: 31 December 2020

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Private Pension Funds Law (applicable from 2020): includes the Concept of Private Pension Funds and regulates types of pension funds that can be established, licensing of a pension fund, pension scheme, membership in a pension scheme, guarantees for members of a pension scheme, management of a pension fund, asset manager of a pension scheme, principles and rules governing the investment of the assets of a pension scheme.
Civil Law
Labor Law
Personal Income Tax Law
Commercial Law; regulates the establishment and operation of the management bodies of a pension fund.

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Plan sponsors

A pension scheme is developed and set by the respective pension fund, and it needs to be registered by the Financial and Capital Market Commission (FCMC).

There is no obligation for the plan sponsor (employers) to set up a pension plan.
Collective agreements are part of the process of establishing a pension plan. Pension plan committee, representatives of employer and employees are involved in the bargaining process.

Pension fund and member of a pension scheme is a natural person who on his/her own behalf or on whose behalf an employer or another natural person pays contributions to a private pension fund, and who is entitled to receive the supplementary retirement benefit in accordance with the Private Pension Fund Law and the pension scheme.

Types of plans

Pension plan should be registered with the Financial and Capital Market Commission (FCMC). A pension fund shall submit documents for registering a pension scheme along with the application for receiving the license.

Pension plans could be both company or multi-employer, as well as open plans.
Participation in occupational pension plans is voluntary for employees. In addition, employees can make voluntary additional contributions to the same and/or another plan.

Any contribution, accrual, investment of monetary assets in a pension fund or any payment thereof to ensure the supplementary retirement benefit shall only take place in accordance with the pension scheme registered with the Financial and Capital Market Commission.

Pension funds shall be closed or open funds:
• A closed pension fund shall be entitled to have one or several pension schemes. Members of pension schemes of a closed pension fund shall only be persons who, upon commencing their membership in a pension scheme, are employees of one or several founders (shareholders) of that pension fund.
• An open pension fund shall be entitled to have one or several pension schemes. Any natural person shall be entitled to become a member of such pension schemes on the basis of a contract and in due course of the Private Pension Funds Law.

In practice, there are only DC plans in Latvia. The legislation allows providing also DB plans. If a DB plan would be decided to be set up by the employer, the rules and methods should be stated in collective affiliation contract and scheme rules respectively.

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Pension funds may be closed and open.

Only such persons (employers) who enter into a collective participation contract with the pension fund may be the stockholders or members of a closed pension fund.

Only the following entities may be the stockholders or members of an open pension fund:

1) a credit institution that has received a licence for the carrying out of operation of a credit institution in a Member State or a Member State of the Organisation for Economic Co-operation and Development;

2) a life insurance company that has received a licence for the carrying out of life insurance in a Member State or a Member State of the Organisation for Economic Co-operation and Development;

3) an investment management company that has received a licence for the provision of management services in a Member State or a Member State of the Organisation for Economic Co-operation and Development.

The entity managing the pension plan should be a separate legal entity from the sponsoring company.
For pure DC plans, excess of income should be paid back to members.
Custodians are involved in the administration of private pension funds.

Note: This part covers the institution managing contribution and benefit administration. Information on the institution or possibilities for the management of plan assets is included in Section 5 (Financing/investment).

The establishment and operation of the management bodies of a pension fund shall be regulated by the Commercial Law. The establishment of a council shall not be mandatory for a closed pension fund.

A pension fund shall set up an efficient internal audit system to ensure a timely identification and management of all risks associated with the operation of a pension fund, an efficient protection of assets of pension schemes, the fairness and timeliness of information submitted to its management bodies, compliance with laws, other regulatory provisions, regulations and instructions of the Financial and Capital Market Commission, and with the policies and procedures developed by the pension fund, as well as the pension fund's continuous oversight of the internal audit system, which is independent of the executive body. A member of the board of the pension fund, including the person responsible for the risk management function, the person responsible for the internal audit function, the person responsible for the actuary function, and also the person who is authorised to take decisions on behalf of the pension fund may be a person who complies with the following requirements:

1) he or she is competent in the field for which he or she is responsible so that the pension fund would be able to carry out the accumulation of the supplementary pension continuously, professionally, in good quality and in accordance with the requirements of laws and regulations;
2) he or she has a higher education and corresponding professional work experience of not less than three years;
3) he or she has not been punished for an intentional criminal offence against property or a criminal offence of an economic nature;
4) his or her right to perform commercial activity is not withdrawn and has not been withdrawn;
5) he or she has an impeccable reputation;
6) the person responsible for the actuary function - also the knowledge of and experience in actuarial mathematics and financial mathematics which conform to the type of activity and risk complexity characteristic to the activity of the pension fund and it can be clearly demonstrated.

A person who conforms to the following requirements may be a member of the council (if any has been established) of the pension fund:
1) he or she is competent in the financial management issues;
2) he or she has an impeccable reputation;
3) he or she has not been punished for an intentional criminal offence against property or a criminal offence of an economic nature;
4) his or her right to perform commercial activity is not withdrawn and has not been withdrawn. Where an employer has concluded a collective membership contract with an open or a closed pension fund, the employer and employees who have membership in a pension scheme shall jointly set up the pension scheme committee, where the employer and employees are equally represented. Where less than one hundred employees of an employer have membership in a pension scheme, setting up the pension scheme committee shall not be mandatory.

The pension scheme committee is the overseeing institution of a pension scheme that controls the management of the respective pension scheme and compliance with the provisions of the collective membership contract.

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A pension scheme member may participate in a pension scheme both directly and with the intermediation of his or her employer.

A pension scheme member shall participate in a pension scheme directly by entering into an individual participation contract with an open pension fund.

Members of a pension scheme shall have membership in a pension scheme through the intermediation of their employer, where the employer has concluded a collective membership contract with an open or a closed pension fund. Moreover, a collective membership contract with a closed pension fund may be concluded only in those cases where the relevant employer is also one of the founders (shareholders) of that closed pension fund. The legal relationship between an employer and its employees that arises as a result of the implementation of a pension scheme and the participation of employees therein shall be governed by an employment contract or a collective employment contract.

Where an employer takes a decision to pay contributions to a pension scheme to ensure the supplementary retirement benefit for its employees, that decision shall apply to all employees of that employer in accordance with their profession, length of service and position, as well as other objective criteria.

Issues relating to the membership of those persons to whom one and the same objective criteria referred to apply shall be treated similarly, and no discrimination on the grounds of origin, property status, race and nationality, sex or religion shall be permitted.

 

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Sources of funds

Employee contributions

No contribution rates are prescribed by the law.

Employer contributions

Employers contribute to pension plans on a voluntary basis. No contribution rates are prescribed by the law.
In practice, there are only DC plans in Latvia. The legislation allows to provide also a defined contribution plan with a guaranteed return or a defined benefit plan or a pension plan covering biometric risks (DB) plans. If a DB plan would be decided to be set up by the pension fund, the rules and methods should be stated in collective membership contract with employer and scheme rules respectively.

Other sources of funds

None

Methods of financing

Since there are only pure DC plans, the benefits of members depend on contributions made and investment income.

Legislation allows providing DB plans where liabilities are covered by either the employer or the pension fund. For a pension fund that offers DB plans, the minimum amount of own funds is EUR 3,000,000. In order to assess the financial stability of the pension fund, the own funds shall be compared with the solvency margin. A pension fund has complied with the solvency requirement if its own funds are equal to or higher than the solvency margin. These requirements not apply to a closed pension fund if the employer has committed responsibility for the fulfilment of the obligations specified in the DB plans rules.

Asset management

The pension plan assets shall be managed solely by the following commercial companies:

1) a credit institution that is entitled to provide investment services and ancillary (non-core) investment services in Latvia;
2) an insurance joint-stock company that is entitled to engage in life insurance in Latvia;
3) an investment brokerage company that is entitled to provide investment services in Latvia;
4) an investment management company that is entitled to provide management services in Latvia;
5) an alternative investment fund manager who is entitled to provide the investment services and ancillary investment services in Latvia referred to in Section 5 (Financing/investment), Paragraphs seven and eight of the Law on Alternative Investment Funds and Managers Thereof (namely individual investment portfolio management and provision of investment advice);
6) a pension fund which fulfils the requirements of Section 25 of the Private Pension Funds Law regarding own funds.

The asset manager of a pension scheme shall ensure the implementation of the investment strategy as approved in the rules of pension plan and compliance with the investment rules of the pension fund, effect settlement using money contributed in accordance with the pension scheme, receive and transfer financial instruments and make other transactions in the assets of the pension scheme in accordance with the requirements of the Private Pension Funds Law and the pension schemes registered by the Financial and Capital Market Commission.

There is prudent person rule, diversification rules as well as limits on self-investments.

There is no legal requirements for minimum/maximum level of management fees or administrative costs in Latvia.

Rules for the management of money and other assets shall be provided for in the contract concluded by the executive board of a pension fund with an asset manager. The decision on concluding that contract shall be taken by the executive board of a pension fund. The contract with an asset manager and any further amendments thereto shall be submitted to the Financial and Capital Market Commission within three business days after they have been signed.

The investment policy is developed by pension fund and implemented by asset manager.

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Acquisition and maintenance of rights

Waiting period

The period could be stated in the scheme rules and anti-discrimination should be ensured in this case.

There are no legal maximum/minimum age conditions for participating in a pension plan.

Vesting rules

Members are entitled to all accrued capital in individual account without any restrictions.

Preservation, portability, transferability

There is no regulation concerning the preservation of the value of accrued vested rights of plan members who leave the plan before normal retirement age. The member can transfer the capital to another pension scheme to make individual contributions.

Depending on the scheme rules, an employee can continue to contribute to the same pension plan while moving from one job to another.
Members' pension rights can be transferred from one plan to another.

The value to be transferred from one plan to another will represent all accrued capital for DC schemes and for DB plans this should be determined in scheme rules.

Retirement benefits

Benefit qualifying conditions

The retirement age specified in a pension scheme shall not be less than 55 years, with the exception of special pension schemes for certain professions, the list of which is approved by the Cabinet of Ministers.

Benefit structure / formula

In practice, there are only DC plans provided in Latvia.

Pension plans provide earnings related benefits.

Type of benefits paid at retirement depend on a particular scheme rules and affiliation contract.

There are no legal restrictions on the amount of the benefits, which may be taken as a lump sum.

Benefit adjustment

There are no legal requirements for indexation of pension benefits.

Survivors

In case of the death of a participant of the pension plan, heirs of the participant or elected persons have the right to the supplementary pension capital accumulated in accordance with the procedures prescribed by the Civil Law.

Disability

A member of a pension scheme who has been recognised as a first group invalid for the lifetime and the person and the heir indicated by a member of a pension scheme in case of his/her death shall have the right to receive benefits in accordance with the rules of a pension scheme before reaching the retirement age in due course of the Civil Law.

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Where a pension fund, a custodian or an asset manager has been declared insolvent or is under liquidation, the assets of a pension scheme shall not be included in the property of the pension fund, the custodian or the asset manager, which are debtors.

Monetary assets contributed to a pension fund by a member of a pension scheme himself/herself or on his/her behalf shall be promptly (not later than on the next business day after crediting the account opened for the pension scheme) credited to the individual account of that member of a pension scheme.

The supplementary pension capital accrued on an individual account shall never become the property of an asset manager, a custodian or an employer. The supplementary pension capital shall be subject to collection only where a court judgment recognises that a member of a pension scheme has caused detriment to third parties by committing a criminally liable offence.

A member of a pension scheme shall be provided with an opportunity to continue membership in the pension scheme, receive the supplementary pension capital and get information to be provided to members of a pension scheme in accordance with the Private Pension Funds Law also where that member of a pension scheme, after commencing membership in the pension scheme, moves to settle permanently in an EU member state, a country of the European Economic Area or any other foreign country.

Protection of Assets

The Credit Institution Law determines that during insolvency proceedings the list of property of a credit institution shall not include other property belonging to third parties which is in possession of the credit institution and funds of State funded pension scheme investment plans, funds of pension schemes of private pension funds, the funds provided for fulfilment of the obligations laid down in pension schemes and insurance contracts, if such condition is referred to in the deposit contract, and the funds of the Guarantee Fund of the Compulsory Civil Liability Insurance of Motor Vehicle Owners.

Also the funds in the account opened with the credit institution in the name of the private pension fund shall be considered as the property belonging to third parties which is in possession of the credit institution, provided that the contract between the private pension fund and the credit institution provides that such account may be only used to make contributions to the pension schemes of private pension funds or to perform pay-outs to the recipients of supplementary pension within the meaning of the Private Pension Funds Law.

The administrator shall ensure safekeeping of the property belonging to third parties until its transfer to the owner.

Financial and Technical Requirements / Reporting

In order to perform its supervisory functions and for statistical purposes, the Financial and Capital Market Commission is entitled to request the pension fund to prepare reports on the activities of the pension fund and its registered pension plans. The Financial and Capital Market Commission shall issue regulations regarding the procedure for preparation and submission of such reports.

Whistleblowing

The custodian shall follow whether the manager of funds complies with the requirements of the Private Pension Funds Law and other laws and regulations in relation to pension scheme investments and the pension scheme registered by the Financial and Capital Market Commission, and also with the provisions of contributions (investments). If the manager of funds fails to comply with these requirements and provisions, the custodian shall notify the Financial and Capital Market Commission and the pension fund thereof.

Additionally in accordance with the Whistleblowing Law of the Republic of Latvia any natural person carrying out their duties or establishing legal relations related to the fulfilment of their duties, has obtained information on a possible violation which may harm the public interests, and if the person considers this information to be true, may raise alarm submitting a whistle-blower's report.

Infringements in the financial instruments market shall be reported in accordance with the procedures specified in the regulatory provisions of the Financial and Capital Market Commission - Regulations on the Procedure for the Reporting of Actual and Potential Infringements of Regulatory Provisions by a Person and Examining the Report by the Financial and Capital Market Commission (full text available in Latvian only). Regulatory provisions have been developed, introducing the European Union legal framework in the area of the financial instruments market in Latvia, and this framework provides for the possibility to report on the above violations also anonymously.

Standards for service providers

The pension fund may delegate the activities which are necessary for the provision of activity of the pension fund within the meaning of the Private Pension Funds Law to one or several providers of outsourced services which, on the basis of a written contract with the pension fund, undertake to provide or provide outsourced services to the pension fund and which have a corresponding qualification and experience in the provision of the abovementioned services.

The obligations comprised in the internal audit function of the pension fund may be delegated as an outsourced service only to a sworn auditor or a commercial company of sworn auditors, which is not carrying out the audit of the annual statements of the pension fund.

The Private Pension Funds Law determines several provisions that shall be included in the outsourced service contract:

1) a description of the outsourced service to be received;

2) precise requirements for the amount and quality of the outsourced service;

3) the rights and obligations of the pension fund and the outsourced service provider, including:

a) the right of the pension fund to continuously supervise the quality of the provision of the outsourced service;
b) the right of the pension fund to give the outsourced service provider instructions to be executed on a mandatory basis in issues which are related to the execution of the outsourced service in good faith, good quality, timely manner and in conformity with laws and regulations;
c) the right of the pension fund to request the outsourced service provider and the obligation of the outsourced service provider to terminate the outsourced service contract without delay after receipt of a written request;

4) the right of the Financial and Capital Market Commission to become acquainted with the documents and to request other information from the outsourced service provider which is related to the provision of the outsourced service and is necessary for the carrying out of the supervisory functions.

Fees

There are no certain limits (caps etc.) set for pension fund fees, they are a subject for competition among pension funds

Winding up / Merger and acquisition

N/A

Bankruptcy: Insolvency Insurance / Compensation Fund

If the pension fund, custodian, or manager of funds has been declared insolvent or is being liquidated, the funds of pension schemes may not be included in the property of the pension fund, custodian, or manager of funds - debtor.

Disclosure of information / Individual action

Pension fund shall prepare the annual report. Pension fund shall ensure that the annual report together with the auditor's report prepared by an external auditor is published not later than four months after the end of the reporting year. The pension fund publishes the relevant information on the website.

The pension fund prepares a report on the supplementary pension for each participant of the pension plan, taking into account the current requirements of the Latvian pension system, social, employment and tax regulations.

Information in the report regarding the supplementary pension shall be updated at least once a year, which the pension fund, by selecting appropriate electronic communication options, shall make available to the pension plan participant free of charge for the relevant reporting period.

Other measures

N/A

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The state shall establish a special procedure whereby taxes related to pension funds, their operations, investment income and contributions to pension funds are paid and the relief in respect of the personal income tax and the corporate income tax.

Tax relief and the special payment procedure shall apply only to those licensed pension funds whose pension schemes are licensed pursuant to the requirements of the Private Pension Funds Law and to members of licensed pension schemes.

Taxation of employee contributions

N/A

Taxation of employer contributions

Tax-deductible

Taxation of investment income

Tax-deductible

Taxation of benefits

Tax-deductible

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The Financial and Capital Market Commission supervises the financial activity of a pension fund and the procedure whereby it submits information to members of a pension scheme or beneficiaries.

Kungu iela 1, Riga, Latvia, LV 1050
Telephone: + (371) 6 7774800
Fax: + (371) 6 7225755
E-mail: [email protected]

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