SLOVAKIA - The European Commission has warned Slovakia it must remove restrictions on statutory second pillar pension funds which prevent schemes from investing in non-euro area assets.

A reasoned opinion letter has been out in the second stage of infringement proceedings arguing Slovakia should alter its investment rules as it is currently in contravention of Article 63 of TFEU concerning the free movement of capital, or face the matter being referred to the European Courts of Justice.

Slovakia currently imposes a law on its six mandatory second pillar schemes stating pension funds may invest up to 50% of their net assets in "transferable securities and money market instruments issued or guaranteed by a Member State belonging to the euro area".

Funds can invest up to 20% of their assets in non-euro countries, but are not allowed to invest between 20% and 50% of their assets in financial instruments of a single non-euro area Member State.

Pension funds are only able to complete these transactions where they account for over 20% of no-EU assets with the authority of the National Bank of Slovakia - a move which the EC claimed "allows the Slovak authorities to main a discrimination" against investing in non-EU countries.

Slovak authorities responded to earlier correspondence from EC officials by claiming it maintained this strategy in a bid to limit currency and exchange risks. However, EC officials said they do not see "any overriding principle of public interest that can justify such discrimination".

In particular, the EC opinion argued: "Limiting investments to instruments issued or guaranteed by Member States in the Euro area is not suitable to limit credit risks, and the fact that a State issuing or guaranteeing a financial instrument is not from the Euro area does not rule out the solvability of a debtor."

A raft of changes unveiled in Slovakia since November 2008 are likely to have encouraged pension funds to more away from higher risk strategies in equities towards more conservatives, low-growth structures dependent on fixed income investments - making any restrictions on the type of bond investments they can make even tougher to handle.

Private second pillar pension funds were introduced in Slovakia in 2005 and made mandatory for all new entrants to the employment market who were not previously insured under the Social Insurance Agency.

Yet the sector has been under pressure since Robert Fico took over the coalition government and continues to argue that these schemes offer lesser benefits than employees who remain under the first pillar.

All second pillar private arrangements are required to provide a form of guarantee related to fees, which states should any fund make a loss over a six-month period they are required to plug any balance from either a guarantee account or from its own assets.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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