EUROPE - The Czech upper house yesterday rejected a raft of legislation that would have created a mandatory second-pillar funded pension system in the central European country, following a vote last week to reject a VAT hike that would have financed the measure.

While the two votes are unlikely to derail the reform for long - the country's centre-right government has a majority in the lower house that allows it to override the Senate's decisions - they highlight the political difficulty countries across the region have encountered in persuading electorates to swap state pension provision for even partially funded schemes, especially at a time when social security budgets are stretched.

Left-wing parties in the Czech Republic's Senate rejected three proposed laws yesterday.

The first would have allowed employees to divert some of their contributions to the state pay-as-you-go pillar to funded second-pillar pension schemes, while the second would have converted schemes in the existing voluntary pillar into formally incorporated pension companies.

The third would have made minor amendments to some 20 pieces of existing legislation.

The centre-right coalition has long promised to introduce a funded pension system in the country, which is the only new EU member that has not yet reformed its retirement system along World Bank lines.

The opposition Social Democrats have resisted the reform, which argue that diverting money from the state pillar to build up the funded pillar risks destabilising existing state provision.

The government is confident the measure will nonetheless pass.

"The Chamber of Deputies (where the Czech coalition government is in majority, unlike in Senate) will pass the law as soon as possible," said Veronika Lukasova, a spokeswoman for the Finance Ministry.

Miroslav Kalousek, the finance minister, has staked his reputation on driving through pensions reform.

"It is completely unrealistic to expect any sharp boost in the birth rate, so it is necessary to increase pension savings and cut down on current consumption," he said, adding that a hike of VAT from 10% to 14% and possible privatisation revenues would cover the temporary state pillar shortfall that would result from the diversion of some social security contributions.

But the Social Democrats have vowed they will reverse the reform if they take office.

Events elsewhere in the region suggest this is not an idle threat. With growth across Central and Eastern Europe slow and state budgets stretched, moves to rein in existing funded systems have been mooted in Bulgaria, Hungary, Lithuania and Romania.

So far, only Hungary has gone the full distance, nationalising some €10bn in private pension assets last year.