August 10, 2012 / 11:16 AM / 8 years ago

Slovakia follows peers to shift pensions back to state

* Private pensions contribution cut to 4 from 9 percent

* Measure part of wider austerity aimed to narrow deficit

* Opposition angry, analysts warn of future risks due ageing

By Martin Santa

BRATISLAVA, Aug 10 (Reuters) - Slovakia became the third country in the European Union’s former communist eastern wing to reclaim funds from private sector pensions for the state on Thursday, planning to siphon off 300 million euros this year and next to help reduce its budget gap.

The move, similar to steps already taken by Hungary and Poland, will help the euro zone’s second poorest economy by per capita income make good on a promise to cut its fiscal gap to less than 3 percent in 2013.

The change marks a reversal of a reform, introduced in 2005, allowing people to save part of their mandatory state pension contributions with private pension funds rather then just relying on a state system burdened by an ageing population.

That reform, praised as a major success for many of the former communist economies who joined the European Union in 2004, has fallen flat due to poor recent results for many funds, the governments say.

“This is a move shielding a majority of Slovaks. Results of the second pillar are catastrophic,” Prime Minister Robert Fico told reporters.

Neighbouring Hungary and Poland have also moved to cut contributions into private pension funds.

Critics say governments have just taken the opportunity to seize back resources which can benefit the budget in the short term but store up future liabilities.

The Slovak finance ministry expects the measure to give it an additional 71.6 million euros in resources this year and 229.2 million euros next year.

Contributions to private pension funds, deducted from the gross wage, will be cut to 4 percent from 9 percent effective from September, and Slovaks will also be allowed to send an additional 2 percent from their own net income.

There will also be a four-month period, until the year-end, allowing interested Slovaks to leave the private pension pillar altogether.

“Cutting contributions to private pension pillar means the state will be paying less now, but will have a more difficult time in the future, when current employees retire,” said Michal Musak, senior analyst at Slovenska Sporitelna.

“It does not save the money to the state, but rather shifts it in time,” he added.

The parliament also approved a change in the retirement age, now standing at 62 year, which will be, starting 2017, tied to an average life expectancy, meaning the longer Slovaks will live the later they will retire.

Centre-right opposition parties have accused the government of planning to steal Slovaks’ private savings over eight days of heated debate in parliament.

Finance Minister Peter Kazimir said in July that an extra 500 million euros will be needed this year and 1.5 billion euros in savings and tax hikes in 2013 to meet the deficit target.

There are six private pension companies who manage the savings in pension funds. Assets under management stood at 5.2 billion euros on their accounts as of end-July. (Reporting by Martin Santa; Editing by Patrick Graham)

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