Croatia embarks this month on a radical two stage overhaul of its overburdened pensions system, with retirement ages set to begin gradually increasing for the country's 1.4m workers and the terrain prepared for the introduction of funded retirement schemes in January 2000.

Present retirement ages for men and women of 60 and 55 respectively, will now increase to 65 and 60, whilst early retirement ages climb to the previous pensionable age.

The calculation period for the pay-as-you-go (PAYG) first pillar in Croatia will switch from a '10 best years' to a full career basis, with the introduction to follow of a basic pension level for all workers entering mandatorally or voluntarily into next years multi-pillar pension set-up. Pensions, presently indexed to wages will now be linked to a combination of wages and prices, with further attempts to tighten and reduce social security pensions still to be announced.

The new basic pension amount will be calculated on a two tier level, comprising an initial 0.25% of average wage for each year of service and a further 0.25% of average individual wage history on each working year.

The proposed second pillar schemes will be mandatory for employees under the age of 40, around 700,000 workers, and optional for those above. Contribution levels will be 5% of gross salary, with the remainder of the current 21.5% national insurance rate continuing to fund the PAYG pillar. An unfixed portion of salary, it is proposed, could then also be invested in a private pension arrangement.

Around 200,000 workers above 40 are expected to take the voluntary pensions option and join one of the authorised and licenced private re-tirement funds.

Current investment restrictions of a 50% minimum in Croatian government bonds, 30% in domestic equities and a maximum of 15% in foreign assets will still apply to the funds, although the legislation places no limits on foreign investment managers coming into the market, as long as they possess a capital base of of 40m kunas (Ecu9.4m) and attract client membership of at least 80,000 em-ployees after three years.

A separate level of 15m kunas has been set for management of third pillar schemes.

Topics