CROATIA - Croatian pension funds have a “cloud of insecurity” hanging above them, according to market experts, following a statement by the prime minister claiming the mandatory second pillar had been “a failure”.

The Croatian prime minister Ivo Sanader described the mandatory second pillar as “a failure” in the local media a few weeks ago and hinted at government plans to allow people to opt out of the supplementary retirement provision.

His comments were made after the four pension funds in the mandatory pillar set up in 2002 reported a negative return of -12.5% for 2008.

Pension funds have not heard from the prime minister on the subject since then but the proposed legal changes are not off the table yet, according to Hrvoje Krstulovic, a member of the management board at Erste Securities Zagreb, a subsidiary of Austrian banking group Erste which runs a pension fund in Croatia.

“The cloud of insecurity is above us,” he told IPE, and claimed the prime minister’s statement was “rash - to say the least”, though other market participants feel the prime minister’s statements were just made “to test public opinion” on the subject.

Krstulovic does not believe many people would make use of an opt-out as Slovakia’s earlier move to encourage individuals to opt-out of second pillar plans - in a bid to boost domestic finances - failed to gain any real momentum. (See earlier IPE article: Slovakia continues 2nd pillar erosion)

That said, he estimates the mandatory pension funds could lose up to 10% of their assets.

“We all know that the intergenerational solidarity principle is obsolete because of lower birth rates and the only way to have an adequate pension is to save money in private funds,” he said.

“The special, boundary, cases when the second pillar returned less money than state pension alone are really small in number and therefore should not be regarded as proof of such statement.”

The association of Croatian pension fund management companies has noted in a paper that the current crisis is an historic event which will be overcome in time.

More importantly, it added an erosion of the second pillar would only serve as a short-term fix for the government’s liquidity problems but would leave far greater problems in the real future.

Instead of allowing people to opt out of the second pillar, the association would like to see other reforms to strengthen it, including a contribution increase from 5 to 10%, as experts have demanded for some time.

At the end of 2008, the four Croatian mandatory pension funds had HRK22.9bn (€3.1bn) in assets under management, up from HRK21bn the year before. (See earlier IPE story: Croatian funds grow 18%)

The funds were mainly invested in domestic government bonds at the end of last year as the average allocation was 70% of total assets.

Domestic shares made up another 10% and only HRK481m of assets was invested in foreign equities

However, fund incraesed their exposure to foreign government bonds in January from HRK307m to HRK817.9m, leaving the rest to be invested in funds, cash, domestic corporate bonds and short-term deposits.

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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