Valters Smiltāns, Signet Bank investment analyst
In 2025, the Lithuanian parliament adopted significant changes to the country’s second pension level system, which came into effect in 2026. The reform significantly increases the flexibility of the system and effectively makes participation in it voluntary. Among them, there is a two-year “window” during which participants can withdraw money from the second pension level. These changes raise the issue of potential capital redistribution and possible impact on the Baltic stock markets.
The new rules envisage several scenarios, including the possibility of reducing the amount of contributions. At the same time, participants are given the opportunity to completely withdraw from the 2nd pension level, excluding all savings (including investment returns), or to make a one-time withdrawal of 25%. It is important that the costs are not subject to VAT, but a 3% tax is deducted.
According to the estimates of the Central Bank of Lithuania in 2025, the total asset value of the second pension level reaches approximately EUR 9 billion. Of this amount, approximately EUR 5.65 billion correspond to individual contributions and accumulated investment profits. After the 3% tax adjustment, the amount that pensioners could withdraw is EUR 5.5 billion. However, participant behavior (volume of withdrawals and use of withdrawn funds) is highly uncertain and any estimates are based on assumptions.
The example of Estonia is the most relevant in the Baltic context
A relatively close example is the Estonian pension reform, which was introduced in 2021. Although macroeconomic and external conditions differ, this remains the most relevant comparative case in the Baltic context. After Baltic Finance Centre it is estimated that by mid-2025 in Estonia, approximately one-third of eligible Tier 2 participants had withdrawn funds at some point.
In total, around EUR 2.3 billion were withdrawn in the first four years.
The structure of the use of money provides a significant insight into the priorities of households. A study by the Central Bank of Estonia shows that:
- 50% of the funds were still in bank deposits a year after the reform
- 30% was directed to repayment of consumer debts
- 15% contributed to consumption
- 5% were used for other purposes, including investments
These data indicate that reinvestment in the financial markets was by no means the dominant scenario.
Impact on the Baltic stock market without lasting effect
The Baltic indices show that the withdrawal of pension funds in Estonia did not have a significant or lasting effect on the Baltic stock market. At the same time, this money was probably a significant source of funding for a series of IPOs at the end of 2021 (Enefit Green, Hepsor, Virši-A, DelfinGroup, Modera, TextMagic).
The first capital inflows started in September 2021, but stock indices peaked already in early September, driven mainly by factors such as the easing of Covid restrictions, vaccination progress and economic recovery. Thus, any positive effect from pension inflows was likely to be secondary and relatively limited. It is not excluded that some investors already positioned themselves in advance, expecting a potential increase in demand.
Potential capital inflow to the Baltic markets
Applying the Estonian experience to the Lithuanian reform, we can develop an indicative scenario. Assuming that approximately 30% of EUR 5.5 billion is withdrawn (EUR 1.65 billion) and 1-5% of it is directed to investments, the potential capital inflow into the financial markets could reach EUR 16.5-82.5 million. However, it should be taken into account that a significant part of the funds will likely be directed to other global financial markets and a part will be invested in time deposits and bonds, which have recently strengthened much better than shares in the Baltics.
Considering that the total capitalization of the Baltic stock market is EUR 11.4 billion, such an inflow corresponds to 0.1-0.7% of the stock market capitalization. Accordingly, in the baseline scenario, the impact on market liquidity and prices would be limited, albeit marginally positive. At the same time, it can be assumed that a greater part of the funds will be directed to local (Lithuanian) companies, taking into account ” home bias” effect and better investor awareness of local issuers. In this case, the Lithuanian stock market could be a relative winner, with a potential inflow of 0.3-1.4% of the local stock market capitalization.
The first withdrawn pension funds will be available to households already in April. Looking at the dynamics of the Baltic stock indices, it can be seen that the relatively best performance is demonstrated by the Lithuanian market. This could potentially be a sign of premature buying by investors in the expectation that some of the withdrawn pension funds could be channeled directly into the local stock market.
It should be emphasized that such an interpretation is far from clear-cut and the growth of the Lithuanian index should be seen in the context of the financial results of the companies included in it, that is, the performance of the companies will be the primary contributor to price changes.
Conclusions
In the baseline scenario, most of the pension withdrawals are likely to go to consumption and debt reduction rather than investment. In addition, why should investors who wish to maintain a long-term investment strategy not continue to use the services of pension managers and retain the 1.5% state co-payment for contributions to the 2nd pension plan. It may be that the pension can be partially withdrawn in order to direct it to the Baltic companies that you like.
Although a small positive effect on stock price levels and market liquidity is possible, there is no reason to expect structurally significant changes in the Baltic stock market. The liberalization of the pension system in itself is unlikely to become a catalyst for rapid market development or convergence with developed Western European markets.
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