Lithuania’s revamped second-pillar pension system, which took effect in 2026, is now largely voluntary, prompting questions about potential capital redistribution and its impact on Baltic stock markets.
Changes enacted by the Lithuanian parliament in 2025 introduce significant flexibility, including a two-year window for participants to withdraw funds from the second-pillar pension system. Participants can now reduce their contribution levels, fully withdraw their accumulated savings (including investment returns), or make a one-time withdrawal of 25% of their funds. Withdrawals are subject to a 3% tax, but are exempt from income tax.
According to estimates from the Bank of Lithuania in 2025, the total value of assets in the second-pillar pension system reached approximately EUR 9 billion. Of that amount, roughly EUR 5.65 billion represents individual contributions and accumulated investment gains. After accounting for the 3% tax, approximately EUR 5.5 billion could be available for withdrawal by pension participants. However, predicting participant behavior – including the extent of withdrawals and how those funds will be used – remains uncertain and relies on assumptions.
Estonia’s Experience Offers a Relevant Comparison
The 2021 pension reform in Estonia provides a useful, albeit imperfect, comparison for Lithuania. While macroeconomic and external conditions differ, Estonia’s experience remains the most relevant benchmark within the Baltic region. Baltic Finance Centre estimates that, by mid-2025, approximately one-third of eligible second-pillar participants in Estonia had withdrawn funds at some point.
Over the first four years of the reform, around EUR 2.3 billion was withdrawn. An analysis of how those funds were used reveals key insights into household priorities. Research from the Estonian Central Bank indicates:
- 50% of funds remained in bank deposits one year after the reform.
- 30% was used to repay consumer debt.
- 15% was allocated to consumption.
- 5% was used for other purposes, including investments.
These figures suggest that reinvestment in financial markets was not the dominant trend.
Limited Impact on Baltic Equity Markets
Baltic market indices show that the withdrawals in Estonia did not create a significant or lasting effect on Baltic equity markets. However, the funds may have been a key source of financing for a number of initial public offerings (IPOs) in late 2021, including Enefit Green, Hepsor, Virši-A, DelfinGroup, Modera, and TextMagic.
Initial capital inflows began in September 2021, but equity indices had already peaked earlier in the month, driven primarily by factors such as the easing of COVID-19 restrictions, progress in vaccinations, and economic recovery. Any positive effect from pension fund inflows was likely secondary and relatively limited. It’s possible some investors anticipated increased demand and positioned themselves accordingly.
Potential Capital Inflows into Baltic Markets
Applying the Estonian experience to the Lithuanian reform suggests a potential scenario. Assuming approximately 30% of the EUR 5.5 billion is withdrawn (EUR 1.65 billion) and 1-5% of that amount is allocated to investments, potential capital inflows into financial markets could range from EUR 16.5 million to EUR 82.5 million. However, a significant portion of the funds is likely to flow into other global financial markets and into term deposits and bonds, which have gained more traction in the Baltics recently than equities.
Given that the total market capitalization of the Baltic stock markets is EUR 11.4 billion, such an inflow would represent 0.1-0.7% of market capitalization. Accordingly, the impact on market liquidity and prices would likely be limited, though marginally positive. It’s also reasonable to assume that a larger portion of the funds will be directed towards local (Lithuanian) companies, reflecting “home bias” and greater investor familiarity with domestic issuers. In this case, the Lithuanian stock market could be a relative beneficiary, with potential inflows of 0.3-1.4% of its market capitalization.
The first withdrawals from pension funds became available to households in April. Looking at the performance of Baltic stock indices, the Lithuanian market has demonstrated relatively stronger performance. This could indicate preemptive buying by investors anticipating that some of the withdrawn pension funds may be directed towards the local equity market.
It’s important to note that this interpretation is not definitive, and the growth of the Lithuanian index should be viewed in the context of the financial performance of the companies it includes – company performance will be the primary driver of price changes.
Key Takeaways
In a base-case scenario, most of the withdrawn pension funds are likely to be allocated to consumption and debt reduction rather than investment. Investors seeking to maintain a long-term investment strategy may choose to continue using pension management services and retain the 1.5% state co-payment for second-pillar pension plan contributions. It’s possible that pensions will be partially withdrawn to redirect funds to preferred Baltic companies.
While a modest positive effect on equity prices and market liquidity is possible, there is no basis to expect structurally significant changes in the Baltic stock market. The liberalization of the pension system itself is unlikely to develop into a catalyst for rapid market development or convergence with more developed Western European markets.
