The withdrawal of pension funds in Lithuania is unlikely to make meaningful impact on the Baltic stock market

Valters Smiltāns, Signet Bank investment analyst.

In 2025, the Lithuanian parliament reformed the country’s second-pillar pension system, which came into effect in 2026. The reform significantly increases the flexibility of the system and effectively makes participation in it voluntary. Among other things, it sets a two-year “window” during which participants can withdraw money from the second pillar. These changes raise the question of potential capital redistribution and possible impact on Baltic stock markets.

The new rules provide for several scenarios, including the possibility of reducing the amount of contributions. Most importantly, participants are given the opportunity to completely withdraw from the 2nd pension pillar, withdrawing the entire accumulated funds (including investment returns), or to make a one-time 25% withdrawal. It is important that PIT is not applied to withdrawals, but a 3% tax is deducted.

According to the Lithuanian Central Bank estimates in 2025, the total value of assets in the second pillar is about EUR 9 billion. Of this amount, about EUR 5.65 billion corresponds to individual contributions and accumulated investment returns. After the 3% tax adjustment, the amount that pension participants could withdraw is EUR 5.5 billion. However, the behaviour of participants (the volume of withdrawals and the use of withdrawn funds) is very uncertain, and any estimates are based on assumptions.

The Estonia case study – the most relevant in the Baltic context

The closest example is the Estonian pension reform, which was implemented in 2021. Although the macroeconomic and external conditions differ, this is still the most relevant comparable case in the Baltic context. According to the estimates of the Baltic Finance Centre, by mid-2025, approximately one third of eligible second pillar participants in Estonia had withdrawn funds at some point.  Overall, around EUR 2.3 billion were withdrawn in the first four years.

The structure of spending provides important insight into the priorities of households. A study by the Bank of Estonia shows that:

• 50% of the funds were still in bank deposits one year after the reform
• 30% was used to pay off consumer debt
• 15% promoted consumption
• 5% were used for other purposes, including investments

This data suggests that reinvestment in the financial markets was not the dominant scenario.

Impact on Baltic stock market without lasting effect

Baltic indexes suggest 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 may have been a significant source of financing for a number of IPOs at the end of 2021 (Enefit Green, Hepsor, Virši-A, DelfinGroup, Modera, TextMagic).

The first capital inflows started in September 2021, while stock indices were already at their peak in early September, mainly driven by factors such as the easing of Covid restrictions, progress in vaccination and the economic recovery. Thus, any positive effect from the inflow of pension funds was likely to be secondary and relatively limited. It is possible that some investors had already positioned themselves in anticipation of a potential increase in demand.

Potential capital inflow into the Baltic stock markets

Applying the Estonian experience to the Lithuanian reform, we can develop an indicative scenario. Assuming that about 30% of the EUR 5.5 billion is withdrawn (EUR 1.65 billion) and 1-5% is directed to investments, the potential capital inflow into 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 probably be directed to other global financial markets and part will be invested in term deposits and bonds, which have better established in the Baltics than stocks.

Considering that the total market capitalization of the Baltic stock market is EUR 11.4 billion, such an inflow would correspond to 0.1-0.7% of the stock market capitalization. Accordingly, in the base scenario, the impact on market liquidity and prices would be limited, albeit marginally positive.

At the same time, it can be assumed that a larger share of the funds will be directed to local (Lithuanian) companies, given the 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 reach households already in April. Looking at the dynamics of Baltic stock indices, it can be seen that the Lithuanian market has performed relatively better. This may potentially indicate that investors are buying in advance, expecting that some of the withdrawn pension funds could be directed to the local stock market.

It should be emphasized that such an interpretation is rather a wild guess and the increase in the Lithuanian index should largely be seen in the context of the financial results of the companies included in it, i.e. the performance of companies will be the primary driver of price changes.

Conclusion

In the baseline scenario, most of the withdrawn pension funds are likely to be directed towards consumption and debt reduction rather than reinvestment. Going further, why would investors who want to maintain a long-term investment strategy not continue to use pension fund services and retain the 1.5% state contribution for the second pension pillar. It may happen that the pension is partially withdrawn to direct it to the preferred Baltic companies.

Although there may be a marginally positive effect on stock price levels and market liquidity, 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.