Less than 8 per cent of Latvian pension fund assets are invested domestically, despite pension schemes representing a potentially significant source of financing for local businesses, according to the OECD.

In its latest Economic Survey of Latvia, the OECD said attracting domestic institutional investors, such as funded pension funds, to local capital markets was key to improving companies' access to non-bank finance.

The organisation noted that assets held by Latvia's mandatory and voluntary funded pension schemes amount to more than 70 per cent of outstanding private-sector loans, making them a potentially significant source of demand for newly issued equity and debt.

However, it said pension funds invest mostly in foreign assets and face limits on investment opportunities in domestic assets, while many Latvian firms continue to experience difficulties accessing financing through domestic capital markets.

The OECD therefore recommended raising investment and concentration limits for second-pillar pension funds for single-issuer assets, real estate and private investment funds, while ensuring appropriate risk management and governance processes remain in place.

It said allowing second-pillar pension funds to invest in a wider range of real estate instruments, facilitating greater exposure to private investment funds and increasing investment limits in other instruments could help address investor gaps in Latvia's corporate bond market.

Separately, the OECD highlighted concerns over pension adequacy and said strengthening mandatory funded defined contribution schemes and improving their returns would help support retirement incomes.

The survey noted that average nominal returns generated by Latvian pension funds over the past decade stood at 2.8 per cent, compared with an OECD average of 5 per cent.

However, returns have improved significantly in recent years, reaching 12.6 per cent in 2024. According to the OECD, this reflected reforms that abolished limits on equity investments, capped management fees and increased transparency around fee structures and investment performance, strengthening competition between pension funds.

The organisation also noted that investment portfolios are now more diversified across asset classes, including real estate, private equity and corporate bonds, compared with the 2010s when investments were concentrated in government bonds and bank deposits.

Nevertheless, the OECD warned that old-age poverty in Latvia remains among the highest across OECD countries, particularly among women, due to low pension replacement rates and the limited level of minimum and non-contributory pensions.

Public spending on old-age pensions stood at 7.5 per cent of GDP in 2021, significantly below the EU average of 10 per cent of GDP, while the OECD cautioned that pension replacement rates are projected to decline further under current rules.

The OECD said reducing old-age poverty would require increasing contributory minimum pensions and non-contributory old-age safety-net benefits, while also lowering the contribution threshold required to qualify for public pension benefits.

It also suggested evaluating the impact of the temporary transfer of one percentage point of gross wages from the mandatory second pillar to the first-pillar public pension system between 2025 and 2028, and considering an earlier phase-out of the measure.

According to the OECD, such a move could help strengthen future pension adequacy while also expanding the role of Latvian institutional investors in domestic financial markets.

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