DESIGNING BETTER PENSIONS IN THE BALTICS

The Baltic pension systems are entering a pivotal period. Demographic pressures, declining public pension replacement rates, and weakening trust in funded pensions have increased the importance of designing systems that work for real human behaviour rather than idealised rational decision-makers.

This report argues that behavioural insights are no longer optional but are essential to achieving adequate retirement outcomes in Estonia, Latvia, and Lithuania.

Behavioural research consistently shows that retirement saving is one of the most complex financial decisions that individuals face. Most people rely on defaults, simple heuristics, and short-term considerations rather than active financial planning. As a result, pension outcomes are heavily influenced by system design. Decisions about enrolment, contribution rates, fund selection, withdrawal rules, and communication strategies all shape saving behaviour.

The evidence reviewed in this report highlights several proven tools. Automatic enrolment and well-designed default options significantly increase participation and long-term savings. Auto-escalation mechanisms raise contribution rates without reducing perceived income. Simplified fund menus, lifecycle defaults, timely reminders, effective framing, and strategically designed friction can improve decision quality while preserving freedom of choice. Baltic examples demonstrate these effects in practice, including Estonia’s default-fund reforms and a nationwide pension reminder experiment that increased voluntary pension contributions by more than 10% at minimal cost.

Trust emerges as a critical foundation. Behavioural interventions are most effective when savers believe the system is stable, transparent, and fair. Repeated reforms and politically charged pension debates have weakened confidence across the region. The report argues that rebuilding trust requires greater policy stability, transparent disclosure of lifetime costs and expected outcomes, and communication tailored to diverse audiences, including lower-trust population groups.

Behavioural tools are not a substitute for other forms of market regulation and consumer protection. Pension systems are characterised by long time horizons, high complexity, and irreversible consequences. In such settings, reliance on individual responsibility alone is insufficient. Effective pension policy combines behavioural design with strong defaults, fee transparency, appropriate investment standards, safeguards around withdrawals, and independent guidance for major decisions.

The key recommendation is straightforward: design pension systems for ordinary people who are busy, imperfect, and focused on immediate concerns rather than retirement. For policymakers, this means preserving automatic enrolment, strengthening default contribution rates, ensuring regulatory stability, improving transparency, and protecting consumers at critical decision points. For providers and employers, it means simplifying choices, making contributions effortless, using evidence-based communications, and presenting pensions in terms of future income rather than account balances.

Authors: Heidi Reinson and Kristīne Dambe