Defined contribution pension pillars often require participants to take an active role in selecting pension funds during the whole accumulation period. It is expected that pension a fund participant will select an appropriate investment strategy and investment risk during the different stages of the accumulation phase and depending on the years left until retirement. In this paper, we have analysed the behaviour of second pillar pension fund participants in Lithuania from the establishment of the second pension pillar (2004) till Q3 of 2016. The aim of the study is to evaluate how rational second pension pillar participants were in decisions on selecting the accumulation rate, the appropriate pension fund (investment strategy and investment risk) and changing the pension fund over the accumulation period during various stages of the economic cycle in the financial markets. The results show that the majority of second pension pillar participants are irrational in selecting participation rates. Additionally, it was also observed that the majority of pension fund participants make irrational choices on selecting the pension fund (investment strategy and investment risk) and changing it over the accumulation period. The majority of pension fund participants have selected an inappropriate pension fund (investment strategy and investment risk) with regard to the accumulation period left till retirement. Moreover, participants are passive and tend not to change pension funds during the accumulation period. Pension fund participants who did change pension funds made irrational decisions and chose inappropriate pension funds (investment strategy and investment risk): in case of peak periods in stock markets, the majority of second pension pillar participants changed pension funds by switching from the funds with a lower proportion of equities to those with a higher proportion of equities or changed their pension fund to a fund in the same investment risk category. Moreover, in case of bottom periods in stock markets, the majority of participants did the opposite, switching from funds with a higher proportion of equities to those with a lower proportion of equities.

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Pension systems around Europe are being reformed for several decades already. Main objectives of the reforms are to enable people to have adequate income at retirement and to ensure the system’s financial sustainability. Many European countries implemented policies aiming at diversification of financing sources of income at older age: risk-sharing between pay-as-you-go and funded pensions is expected to help in achieving social policy objectives towards pension systems. Central and Eastern European countries (CEE) face even more challenges in ensuring adequate income at retirement. First, CEE countries were required to transform radically their economies in 1990s towards market economy, including old age pension systems. Second, in order to ensure diversified future old age pension income and attract more financial means to the system, introduction of funded pensions from scratch and ensuring as wide as possible coverage with funded pension schemes was of primary importance also. The paper discusses latest developments of retirement pension systems in Europe and state involvement in private pension schemes. In doing so, the focus is on the introduction of funded private pension schemes in selected CEE countries. In spite of initially chosen different paths for the reforms, inconsistent state policies towards funded pensions in the CEE countries resulted in similar outcomes of the reforms. The paper starts with discussion on main objectives of pension systems – enabling people to have adequate income at retirement and ensuring financial sustainability of the systems. Further, possibilities to achieve the objectives of pension reforms are analysed – diversification of income at retirement. Third part of the paper discusses prevailing debates on future of welfare state as such and individualisation trends within different European welfare state models. These debates and perceptions of population about responsibilities of a state for individual welfare affect direction of reforms and future shape of old age pension systems. Fourth part of the paper deals with state policies and tools that are used for encouragement of participation in supplementary pensions. Final part of the paper presents more detailed outline of the pension reforms in selected CEE countries and summarises particular challenges of their pension systems. The paper ends with a discussion on policy implications in relation to latest developments of pension systems in CEE countries.

The proposition to introduce life-cycle investment strategy as a default option in second pension pillar in Lithuania is currently being intensely discussed as a measure to solve the problems of the irrational behaviour of pension fund participants. The latest analysis has shown that the majority of participants have selected an inappropriate pension fund (investment strategy and investment risk) while evaluating the accumulation period that they have left till the retirement. Moreover, most of them are not active and do not change the pension fund during accumulation period. The life-cycle investment strategy allows participants to switch automatically and gradually from one asset allocation to another as they get closer to retirement. Therefore, such dynamic asset allocation must have a strong analytical foundation. The goal of the study is to evaluate the optimal life-cycle investment strategy in the Lithuanian second pension pillar. In order to achieve this goal, the authors prepared a quantitatively calibrated model that closely follows such works as Cocco et al. (2005), Bagliano et al. (2009) and Blake et al. (2008). The model takes into account the specifics of the Lithuanian market such as contribution rates, the investment performance of pension funds, and participant's labour income process. In this paper, the authors use the optimization problem, where participant's utility is maximized only by the selected investment strategy (without consumption). The results show that from the beginning of accumulation period (the age of 20) till the age of approximately 42 years it is most rational to invest a high proportion of participant's pension assets into equities. Then optimal asset allocation is gradually switching from equities to less risky assets (e.g. government bonds) as the retirement age (65) approaches, where only 19 per cent of assets are invested into equities. The paper consists of three main parts: literature review, the explanation of the model and calibrated parameters that were used to evaluate the optimal life-cycle investment strategy, and main simulation results, including benchmark and sensitivity analysis.

Defined contribution pension pillars often requires participants to take an active role in selecting pension fund during the whole accumulation period. It is expected that pension fund participant will select appropriate investment strategy and investment risk during different stages of the accumulation phase and years left till the retirement. In this paper, we have analyzed the behavior of second pillar pension funds' participants in Lithuania from the beginning of second pension pillar establishment (2004) till the 2016 Q3. The aim of the study is to evaluate how rational second pension pillar participants in decisions on selecting accumulation rate, appropriate pension fund (investment strategy and investment risk) and changing the pension fund over accumulation period and during different stages of development (peaks and bottoms) in the financial markets. The results show, that second pension pillar participants are rational on selecting participation rates. However, it also highlighted problems in second pension pillar. Majority of pension funds participants have selected inappropriate pension fund (investment strategy and investment risk) evaluating the accumulation period, which have left till the retirement. Participants are passive and tend not to change pension fund during accumulation period. Pension fund participants, which have changed pension fund, made irrational decisions and have chosen inappropriate pension fund (investment strategy and investment risk): in case of peak period in stock markets, majority of second pension pillar participant have changed pension funds, by switching from the fund which have lower proportion of equities to the fund which has higher proportion of equities or have change pension fund to the fund in the same investment risk category. Moreover, in case of bottom period in stock markets the majority of participants did vice versus-switched from funds with higher proportion of equities to pension fund with lower proportion of equities.