Implementation of the voluntary fully funded pension

Implementation of the voluntary fully funded pension insurance in Croatia in the course of compliance with EU

Directives

Toni LukšićCroatian Financial Services Supervisory Agency

Regional round table - Skopje, Macedonia – 22.02.2007.

Croatian Pension System

Three pillar system• Mandatory pension insurance based on generation solidarity

(“pay-as-you-go” system);• Mandatory pension insurance based on individual capitalized

savings;• Voluntary pension insurance based on individual capitalized

savings

Mandatory and voluntary pension insurance based on individual capitalized savings are Defined Contribution pension schemes.

The payment of pensions is the responsibility of Pension insurance companies.

Voluntary Pension Insurance

Voluntary pension insurance• Open-end voluntary pension funds• Closed-end voluntary pension funds where sponsor may be:

– an employer;

– a union;

– an association of self-employed persons

The only object of activity of a pension company is the establishment and management of pension fund. Voluntary pension company may only establish and manage voluntary pension funds (both open-end and closed-end types).

Voluntary Pension Insurance

Authorization and operation of voluntary pension funds

• Authorization for establishment of pension company

• Pension company is registered with the Trade Register

• Agency issues operating license for establishment and management of a pension fund

Conditions for establishing VPF management company

• Equity capital 15 million HRK, paid in full before registration

• Articles of association, info on founders, management and supervisory board

• Organizational and financial plan

• Conditions for management of the company

Conditions for establishing and operating VPF

• VPF management company authorization

• Articles of association and prospectus– Investment principles and restrictions– Fees (type, calculation and amount)– Information to the VPF member…

• Custody bank

• VPF membership min. 200

Voluntary Pension Insurance

Information to be provided to members and beneficiaries (information prospectus):

• information about pension fund (portfolio of the fund, method for calculating fees for the pension company and custodian bank etc.), pension company and custody bank.

Information to be provided to the competent authorities:

• Audited annual financial statements, details of the sale and acquisition of a pension fund’s assets, information about fees, remuneration and salaries paid etc.

Voluntary Pension Insurance

Investment rules (voluntary pension funds)• basic principles (safe investments, diversity of

investments, maintenance of appropriate liquidity)• Quantitative restrictions (5% per issuer, 20%

outside of Croatia)• Qualitative restrictions (credit rating of a securities

issuer)• Forbidden investments (property, securities

unlisted or not publicly traded, securities issued by pension company, custody bank or related person.

Voluntary Pension Insurance

Government incentives• 25% of contributions, 5.000 HRK per year sealing

(1.250 HRK) • Tax exemption (personal income tax, exemption

for life insurance, private medical insurance and voluntary pension insurance)

• No incentives for companies (contributions to pension funds are treated as salary payments)

Conditions for using the voluntary pension savings

• Minimum 50 years of age

• In case of disability, funds are available regardless of age

• In case of death, the funds of the deceased fund member are transferred to his/her family

Current situation

4 voluntary pension fund management companies

6 open-end voluntary pension funds• 78.000 members, 419 million HRK in net assets

10 closed-end voluntary pension funds• Sponsoring undertaking (6 companies, 2 unions, 2

associations)• 11.000 members, 65 million HRK in net assets

Current situation – Pension Funds

Net assets

VPF Open-end 419.013.000

2,48%VPF Closed-

end 64.927.000 0,38%

MPF 16.408.256.000

97,14%

Current situation – Pension Funds

Membership

MPF 1.328.779 97,14%

VPF Closed-end 10.844 0,38%

VPF Open-end 77.917 2,48%

Voluntary pension funds – investment structure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006

Foreign assets

Receivables

Cash

Deposits

Short-term s.

Inv. funds

Corp. bonds

Mun. bonds

Gov. bonds

Shares

Mandatory pension funds – investment structure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5

Foreign assets

Receivables

Cash

Deposits

Short-term s.

Inv. funds

Corp. bonds

Mun. bonds

Gov. bonds

Shares

Financial institutions – Total Assets

Leasing6,20%

Insurance5,00%

Other4,80%

Pension funds3,90%

Investment funds4,10%

Banks76,00%

Institutions for Occupational Retirement Provision Directive (IORP)

• Internal market Directive– Art. 249 EC Treaty: Binding as to the result to be

achieved– Scope: EEA (EU25 + NO, LI, IS)

• IORP is an institution (not a product):– Established for the purpose of providing

retirement benefits– Operates pension schemes for sponsoring

undertakings

IORP directive

• Single licence, Home Member State supervision– But: Host Member State supervision for social/labour

law + some information requirements

• Investments: Prudent person rule– But: Host Member State may lay down more detailed

rules, provided they are prudentially justified

• Cross-border membership– IORPs may accept sponsorship from abroad– Undertakings may sponsor IORP abroad

IORP

• Authorization• Legal separation from sponsor• Activities limited to ORP business or similar

activities• Information to members: IORP, pension

scheme and pension rights• Information to supervisor, e.g. investments• Relevant social and labor law – host MS

Closed-end PFClosed-end PF

Employer andEmployees

Employer andEmployees

RelevantSocial andlabour law

IORPDirective

IORP

AdministrationAsset mgt.

IORP - Croatia

• Applicable to closed-end VPFs– Open-end VPFs – individual pension scheme, not

under the IORP scope.

• Legal adjustments– Cross-border activities– Investment limitations (risk capital markets)

• Amendments to the Act on Mandatory and Voluntary Pension Funds will be adopted in 2007. IORP provisions will be applicable when Croatia becomes an EU member state.