SLOVAKIA – Slovakia’s latest opt-out for second-pillar pension fund members has significantly exceeded the government’s initial expectation of some 60,000 members.

According to near-final figures from Sociálna poisťovňa, Slovakia’s Social Insurance Agency, 89,439 second-pillar fund members left the system in this exit window – running from 1 September 2012 to 31 January 2013 – while 14,720 joined.

The six pension fund management companies now have to return €280m to the first pillar.

Of the opt-outs, 27% were in the zero tax-paying band and 39% in the next two lowest paying bands.

Of the opt-ins, around 6,000 were younger workers, in the 26-30 year age band.

While the opt-out rate was low in the first five months, the Agency itself speeded up departures in a widely criticised letter sent to members in January suggesting that returning to the first pillar would improve their retirement prospects.

Peter Socha, director of life insurance and savings at AXA Slovakia, said the widely televised reports of the unspectacular take-up of the newly introduced second pillar next door in the Czech Republic – which the opposition has threatened to cancel if it wins next year’s election – may have contributed to Slovak reactions to their ever-changing second pillar.

The system was mandatory when introduced in 2005, became voluntary when Robert Fico’s centre-left party was in power between 2006-10, mandatory when the centre-right government of Iveta Radičová assumed power and voluntary when Fico returned to power in 2012.

This is the third opt-out introduced by Fico.

The first, between January and June 2008, resulted in a net membership loss of 83,500 according to National Bank of Slovakia data, the second, between November 2008 and June 2009 a smaller loss of some 24,000.

Membership declined from a peak of 1.56m at the end of 2007 to 1.43m by the end of 2009, after which it gradually recovered, to 1.45m by mid 2012.

Assets as of the end of September 2012 had grown by 22% year on year to €500m.

The asset growth rate is expected to slow sharply following last year’s cut in the second-pillar contribution rate from 9% to 4% of gross salary, despite the fact members can augment their contributions from their own resources, with tax exemptions on sums up to 2% of the tax base.

Socha said: “We are not seeing, or expecting, many clients making additional contributions.”

The next deadline concerns the type of second-pillar fund into which members can invest.

Under the current system, the pension fund management companies must offer a guaranteed fund, invested in deposits and short-term bonds, and one or more non-guaranteed funds invested in equities, long-term bonds and other instruments.

By 31 March, members of non-guaranteed funds must confirm their decision in writing or be automatically enrolled into a guaranteed fund.

Most are unlikely to bother.

“Currently, some 95% of our members are in non-guaranteed funds, but, by April, this share could fall to around 10%,” said Socha.

This inertia currently poses high risks for asset allocation: in the extreme case of no members confirming by the cut-off day, the fund would have to sell off its equities and other assets not eligible for guaranteed funds immediately, possibly in a falling market.

“Normally, we would have a higher portion invested in equities, but we are waiting in a semi-conservative position,” Socha said.