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Pensija - 2021 02 22
3. pensiju līmenis

News in 3rd pension pillar – the index plan

News in 3rd pension pillar – the index plan

Passively managed pension plans or so-called index plans are becoming more and more popular in the world and also in Latvia. For several years the index plan has been available to our 2nd pension pillar customers, and in response to the growing interest, from 22 February the index plan is also available to SEB 3rd pension pillar customers as well.

The new 3rd pension pillar index plan is a high-risk plan, the assets of which can be invested up to 100% in financial instruments that are linked to stock market indices, therefore it will be the most suitable, if there are at least 20 years until reaching the state retirement age.

In this article, we have summarised the most important information about the passive management method and explain what indices are and how they work.

What is the passive management method?

Index plans represent the passive management method. This is the case where financial terms bear a strong resemblance to the words we use in conversation. By the word “passive” we mean a person who does not actively participate, and observes from a distance, as opposed to the word “active”.

This description explains the nature of management of the index plan: the plan manager observes the financial markets from a distance without making significant changes to the pension plan's investments. Why? Because the manager has invested the pension plan money in financial solutions that are very closely or even completely linked to the selected financial market indices. The expected result – the profitability of the plan will be similar to the market as a whole.

How do the indices “work”?

For example, we can look at one of the best-known stock indices in the world – S&P 500, which includes more than 500 companies from around the world. These include well-known companies such as Apple, Microsoft, Amazon, Facebook and others. The outcome of the index will depend on the overall performance of the shares of all 500 companies. A number of companies will perform well, a number worse, but the index will show the average result.

In turn, the “active” plan manager will not want to accept the average result and will regularly analyse the market, make data-based assumptions, select individual companies from these 500 companies using equity funds, review the portfolio and make changes because they believe that a better result can be achieved in the long run.

What should be taken into account when choosing a plan?

Before deciding for or against any particular pension plan, it is important to evaluate not only the method of management, but also the willingness to take risks, as well as the time left until retirement age. The more years that are left until retirement, the higher the risk that can be taken, but if the retirement day is close, it is wiser to move to a lower risk plan, which aims to save the already accumulated capital. On the other hand, when choosing the index plan, you have to be prepared for more fluctuations – the market goes both up and down.

 


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