CROATIA - The four mandatory pension funds in the second pillar have grown their assets to HRK22bn (€3bn) over the last year even though returns dropped to -3% on average.

Assets in the mandatory sector - created in 2002 - increased by HRK3.4bn between April 2007 and April 2008.

However, returns are now at a year-on-year average of -3%, down from 11% in the previous period. 

The funds have increased their assets by HRK20bn since inception, and generated an average annualised rate of return of 6.4%.

The best performing fund year-on-year was the second largest in the system: the HRK6.5bn Raiffeisen OMF, a subsidiary of the Austrian banking group, although it delivered a -1.5% return.

The largest fund HRK8.2bn is AZ OMF, a joint venture between Allianz and Uni Credit, but it also had a negative return of -2.6% while the HRK2.7bn Erste Plavi OMF and the HRK3.5bn PBZ/CO returned -3.3% and -4.9% respectively.

Assets in the mandatory sector have now reached around 7.7 % of Croatia's GDP so although the International Monetary Fund (IMF) acknowledges "the mandatory pension funds have grown in importance" the international body sees challenges ahead.

"The 5% contribution rate (of gross salary) is quite low for a privately-funded pillar that still functions mainly as a supplement to the public system," the IMF noted in its last report on Croatia.

One other suggstion by the IMF is already being dealt with at Croatia is changing restrictions to the pension funds' investments.

As part of preparing the country's entry into the European Union, Croatia is currently working on implementing the IORP directive which also includes the introduction of the prudent person principle.

However, in a brief on the IORP directive the supervisory authority Hanfa noted the directive allowed for member states to "lay down more detailed rules, provided they are prudentially justified", albeit no details have yet been unveiled.

Mandatory pension funds are currently required to invest at least 50% of assets in government bonds and cannot place more than 20% percent in foreign assets.

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