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.

The aim of the study was is to evaluate the impact of a privately accumulated second pillar component on old-age pension. This evaluation is based on quantitative, statistical data and qualitative analysis of pension accumulation results in second pillar during the years 2004-2012. Three groups of different monthly wage size (low, medium, and high) earners are analyzed by calculating the accumulated amounts and old-age pension values of persons who joined and who did not join the second pillar pension funds in 2004 and who retired in the beginning of 2013. The pension reform success (or failure) is evaluated from the point of view of old age pension beneficiaries by comparison of gain or loss of all three groups of participants due to participation in second pillar pension funds. The results show that due to the longer life expectancy the capital accumulated by women in the second pillar does not exceed the present value of loss in the pay-as-you-go system. The comparison of "official" annuities exposes a more optimistic result for both genders of participants of fully funded private second pillar pension funds, but is not confirmed by commercial annuities.

Pension accumulation companies in Baltics are allowed to offer any number of second pillar pension funds with different investment strategies. Funds are traditionally categorized by maximum limit of investments in equities. It shall help participants to choose the fund according to their risk aversion and age. However, no scientific research has been conducted to assess correctness of such a breakdown and to estimate the differences (if they exist) of pension funds assigned to distinct groups. The results show that there are limitations to the supply side of second pillar pension funds and to participants’ possibilities to select appropriate investment strategies over life-cycle. The findings from statistical analysis suggest that used classification of pension funds is not necessarily meaningful. Even if two funds belong to different categories, this does not mean that their investment strategies and results will differ significantly. It raises the need for stricter rules for setting pension funds’ investment strategies and linkage to age of participants in order to increase compatibility between supply of funds and participants’ needs over life-cycle.

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After the first pension reform in Lithuania, in 1995, the reforming process must continue. Important changes are needed, based on principles of old age security financing. A three-tier system has been drafted and approved by the government as a Concept of the reform. The main change proposed as a first tier is the introduction of a national pension based on the residence principle, instead of the existing basic pension based on the insurance principle. It is expected that in this way the problem will be solved of providing protection against poverty for the increasing number of people who do not have the necessary insurance record. The second tier should be a compulsory funded system based on privately managed pension funds. Several important goals would thus be achieved: diversifying the old age security risk between pay-as-you-go and funded schemes; boosting investment opportunities and encouraging financial markets to develop; offering improved incentives for the working population to contribute; and so on. The main obstacle to the introduction of the second tier is the high transition cost. The third tier would comprise voluntary pension funds: their activities should be liberated and the severe constraints on investment return removed.The first pension reform T he Lithuanian pension system was reformed in 1994-95. The first comprehensive national pension system after the country regained its independence was then established. However, only public-sector pensions were reformed. The establishment of a funded (and eventually private) tier was postponed till later.