Risk level between investment plans

The contributions to the 2nd pension pillar to be reasonably safe and would make a long-term profit that would provide you with a higher pension, the specific provisions are developed and adopted on how much and in what securities the 2nd pension pillar contributions may be invested. The investment rules stipulate that:

  • funds shall be invested mainly in the stock exchange-traded securities and bank deposits, thus excluding the doubtful, secret or to politicized transactions, because the securities prices in the stock exchange and bank interest rates are disclosed and everyone can check how profitable is his pension capital investment.
  • pension capital may be invested in government securities, corporate debt securities (bonds), companies shares, bank deposits, as well as investment funds and risk capital markets. Corporate debt securities and shares have to be on the Official List of a stock exchange, where only the securities of the country`s biggest and best companies are registered and marketed that meet certain quality requirements.
  • Not more than 50% of the total funds may be invested in shares.  Not less than 70% of the investment must be in the Latvian national currency – lats, as well as in euro – but up to 30% may be invested in foreign currencies. These limits are designed taking care of the security of investments.
  • only a limited part of funds may be invested in securities of one company (10%) per investment fund (5%) or deposit in one bank (10%), risk capital market (5%). It is meant to contribute to the investment risk allocation between the different companies and securities.
  • pension capital fund management is transferred to professional managers – specifically licensed investment companies.

Although there are many different investment plans with different degree of risk, basically they can be divided into 3 types:

Conservatives – the money is invested in stable, safe securities, which are usually government treasury bills and bonds or companies` promissory notes or bonds. These investment plans are with a small profitability, but are not as volatile as investments in shares. Due to the low volatility conservative investment plans they are recommended for those, who have less than 10 years till retirement age.

Balanced the money is invested in financial capital markets so that gaining of profit and the associated uncertainty (risk) would be balanced with the preservation of pension funds and security of investments. Balanced plans may invest up to 25% in companies` shares, thereby increasing the expected long-term returns of the investment plan. Balanced plan is recommended for those for those, who have at least 10 years till retirement age.

Active – the money is invested in shares of various companies, because shares have traditionally the highest returns in the long-term. Active plans can invest up to 50% in shares from their funds. However, it is good to remember that investments in shares are also associated with higher risk, it means fluctuations. Active plans are recommended for those, who have at least 10 years till retirement age.

It is important to remember the connection: the higher the expected profit is, the greater is the uncertainty about what profit you will receive in the future.