The current regulation of participation in second pillar pension funds does not allow participants to terminate their pension contracts even if there are important reasons for doing so
The Constitutional Court of the Republic of Lithuania ruled on 7 March 2024 that the existing regulation, according to which the withdrawal of a participant (an individual who accumulates pension funds) from second-pillar pensions accumulation is practically impossible, and is therefore unconstitutional.
What does this mean?
It should be understood that the court’s decision does not mean unlimited freedom to terminate pension contracts and accruals at any time. The Constitutional Court has simply made it clear that a regulation is unconstitutional which does not provide for termination even for important reasons.
In other words, parliament must establish and regulate the option to be able to terminate contracts with good reason. This can be done either by establishing a list of good reasons (open or closed) or by leaving the assessment of any importance to the supervisory authorities, market participants, and the courts.
What can be expected?
The fact that the Constitutional Court sees a problem only in the prohibition of any termination even in the presence of a good reason suggests that the volume of terminations (and of ‘withdrawals’ of funds) will not be large as parliament is likely to limit any such good reasons to a minimum.
However, funds will have to take such potential circumstances into account in their organisation and risk assessment tasks. Accordingly, more liquid, lower-risk investment avenues will be chosen, potentially influencing the profitability of funds. The extent to which this will have a real impact on the local money market and investment supply is not clear.
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