SLOVAKIA - Government plans to allow people to withdraw their savings from the mandatory second pillar pension system could destabilise the system and spark higher inflation, the industry has warned.

The Ministry of Labour, Social Affairs and Family has proposed large scale adjustments to the country's pension system, including a six-month period during which people would be allowed to withdraw their pension savings from occupational pension funds.

It is understood those who choose to "opt out" would only be eligible for half the amount of the state pension but it is not known whether withdrawn savings will be taxed.

Second pillar pension funds were set up in 2005 under the previous government, and cover the majority of working Slovaks.

Newcomers to the labour market are obliged to register with a company pension fund, however, the proposal would allow them to leave the funds between January 1 and June 30, 2008.

Mário Adámek, investment analyst at Aegon in Slovakia, told IPE: "People would be allowed to take their money out of the second pillar and use it freely. This is dangerous, because for the people who are not educated about retirement saving, it would be quite tempting to use this option. Moreover, in case of very massive outflows it could cause higher inflation."

He added: "We can't yet estimate the volume of money that would flow out of the system. If we saw major outflows, it would hurt pension asset management companies due to the decrease of management fees - their sole source of income."

Josef Paska, member of the board of the Association of Pension Fund Management Companies, which represents the country's six pension fund management companies, described the proposal as "a very bad idea".

"The money that's accumulated in the second pillar system is designated for providing security for people in their retirement," he told IPE.

"It could damage the stability of not only the second pillar but the first pillar as well because the money could be withdrawn from the pension system and there would be a gap in retirement savings."

Minister of Social Affairs, Viera Tomanova, has also proposed removing the current cap on pensionable income, which is three times the average industry wage.

A spokesperson for the ministry said: "We clearly understand the claims raised by the pension funds, which view the proposal as a major threat for their business. The Ministry of Labour has no intention to destabilise the pension system. Contrary to the pension funds' claim, the proposal is one of many others designed to boost the long-term sustainability of the pension system."

The ministry would discuss the proposals with all relevant stakeholders, he added.