SLOVAKIA - Private pension providers have welcomed the Slovak government's decision to withdraw plans that would have diverted potential private pension contributions to the mandatory state-run PAYG scheme.

The government, which took office after last June's general election, is a coalition of parties that in opposition had opposed the pension reforms that established the second pillar.

Since taking office it had indicated that it planned to reduce the contribution rate by participants in the schemes that are run by private pension asset management companies to 6% of a gross salary from the current 9%.

Local press reports have quoted the government as claiming that the social security budget is facing a SKK20bn (€568m) deficit. Government sources could not be reached to confirm this figure.

Pressure against the change came from scheme members and international insurers operating in the market.

"This is the property of concrete savers," said Aegon portfolio manager Mario Adamek. "They would regard the change as unconstitutional."

Sensing public unease, a coalition of opposition parties earlier this month submitted a draft constitutional bill aimed at protecting the SKK28.46bn second pillar.

In addition, 90% of pension funds are backed by international financial services groups - a constituency that the government clearly wanted to avoid alienating.

Gabriel Hinzeller, head of portfolio management at KD Investments, said: "It's good news because it means people can keep money in their own accounts. And the market sees it as positive."

Nevertheless, having retreated from the changes, the government is left with finding a way to plug its first-pillar pensions deficit.

"One cannot rule out changes in future," Adamek told IPE. "One risk would come from including [currently excluded] people over 50 in the second-pillar pensions system. A much bigger risk would come from reducing the contribution to second-pillar pensions.

However, Prime Minister Robert Fico raised eyebrows this week when he suggested that pension companies be discouraged from investing in "risky" asset classes such as equities.