Private Pension Funds: Building Up a Viable Background

The Lithuanian Free Market Institute embarked on a pension reform project a few years ago when it began creating the legal framework for the operation of private pension funds in Lithuania. Although, to our delight, we are finalizing this undertaking, we are well aware that a pension reform carried out at one stroke will not be viable.
Presently it does not take much effort to garner support for the idea of private pension funds, and it is feasible to push through pertinent legislation. However, failure to reflect on the environment in which private pension funds will have to operate may entail completely different consequences from those desired. It is crucial therefore to contemplate the setting in which pension funds will be embedded.
The first question is: what is the state vision of the place and role of private pension funds in our country? Evidently, if this vision is based on active participation of the state in economy¾when decisions about capital investments are made by government officials instead of market participants¾such a society will do very well without pension funds. What’s more, it would be a big mistake to institute pension funds in such society and to order them how to invest. Pension funds are a private solution to retirement provision. They are a decision based on private ownership and market operation, therefore dressing it in a state clothing, which is totally foreign to it, may entail very grave consequences.
Government interference in economy is closely related to the monetary system. Naturally, it is too risky for pension funds to operate in an environment with unreliable money which may be manipulated for the attainment of social or economic government ends. We can see what results from speculations about possible currency devaluation and what impact it has on the capital market and financial infrastructure. If such speculations come true and if the authorities neglect to ensure stability of the monetary system, there is no point in talking about private pension funds.
Capital market agents are already waiting for pension funds to be the first active institutional investors. But can we say that everything on this market is ready to ensure safe and successful investments on the part of private pension funds? I do not think so. Much has been accomplished in creating information disclosure mechanisms. We should admit though that a good many companies conceal their real financial situation, often times in order to ease the tax burden or to have unrestricted means to finance various shadow needs. The principles of accounting still fall short of international standards. Since the disclosed information is very likely to differ from the actual one, the risk to invest in such market shares is fairly high.
As long as such traditions prevail, income generated on the market will not necessarily enrich shareholders, therefore institutional investors should be very cautious about their investments. To create fundamental prerequisites for a normal operation of the capital market, it is vital to redesign the tax and accounting systems so that they are simple and transparent and the compulsion to evade taxes does not push businesses onto a shadow or half-shadow road.
It is clearly evident that monetary or tax reform alone cannot precondition economic growth. Now that the formation of the state budget is underway, we are all anxious to know on what principles it will be based. To our dismay, the first documents already show that we are going down the same road. The old 1995-1996 budget expenditures are still there, supplemented by new items, relating to the solution of banking problems, deposit compensation, etc. And no glimmer of a fundamental reform of budget formation.
It is no secret that in public debates the emergence of private pension funds is associated with the aggravation of the situation of today’s pensioners and the areas which remain under state control. However, the state is still very active in those areas which can be associated with private economy alone. The analysis of the budget would surely reveal a number of items according to which substantial allocations are made to joint-stock companies and “other economic activities”.
First of all, the state should withdraw from such areas to be able to focus on those which have not been privatised and therefore have no alternative sources of funding. In planning expenditures in such areas as education or culture, it is crucial to shift from institutional funding to funding of concrete functions and objectives. And if such changes took place now, the readiness to privatise the areas which are at the mercy of government policy would be much better.
So, the environment in which private pension funds will operate still manifests a number of tendencies indicating that private pension funds would be a foreign matter in today’s Lithuanian economy. The Free Market Institute, which has been working hard to prepare a draft legislation on private pension funds, should clearly voice its opinion that it is vital to work in all directions, and should do its best to make this work active and comprehensive on the part of both the public and authorities.
We can hardly accept responsibility for the operation of pension funds in a setting which is completely unsuitable and even foreign to them. It does not mean though that we do not feel responsible. We do¾for the redesign of those areas where reforms are imperative. In a word, for expanding the frontline for the free market.