The election of a new government has added an element of uncertainty to pension reform, writes Barbara Ottawa

At a glance

• Croatia elected a new right-wing government in September 2016.
• The plans for infrastructure investment remain on hold.
• Academics remain at loggerheads over the second pillar.

Before the election is after the election. This saying held true recently in Croatia when elections were held in September 2016 because the independent government of prime minister Tihomir Orešković fell in a vote of no confidence after a year in office. The centre-right Croatian Democratic Union (HDZ) won the election with their leader, Andrej Plenković, appointed prime minister. 

Speaking about the new political mood regarding pensions, Dubravko Štimac, president of the management board at pension fund PBZ Croatia Osiguranje (PBZCO), says: “The current government, both during the campaign as well as after the government was formed, has spoken positively about the second pillar, going as far as suggesting contributions towards the second pillar shall increase when circumstances allow it.” 

Under the previous government there had been talk about using money from the second pillar to finance the state budget. “Croatia hopefully won’t take the path of Hungary or Poland,” said Štimac naming the two bogeymen in the CEE region where reappropriation of second-pillar savings had taken place. 

Just after the election, academics met to discuss the sustainability of the second pillar. Assistant professor at the department of labour and social law of the Zagreb faculty of law, Ivana Vukorepa, was quoted by a newspaper saying “the second pillar was a useful supplementary instrument of social security”. She pointed to “unfairness” in the first pillar with several groups like families, people with low income or disabilities receiving a higher pension than others. 

However, Ivan Lovrinović, the leader of the opposition party Change Croatia (Promijenimo Hrvatsku), and himself a professor at the faculty of economics in Zagreb, called the second pillar a “great deception”. He argued it will not lead to higher pensions but only to tax increases in the future as the first pillar deficit has to be financed somehow. He suggested taking the money out of the second pillar. 

croatia mandatory pension fund portfolios and statistics

His colleague Ljubo Jurčić from the Zagreb faculty of economics argues Croatia should not have a funded second pillar because it lacked an established investment market. 

At the end of October 2016, almost 72% of the €10.8bn in the mandatory second pillar was invested in Croatian government bonds with 12% in domestic equities and 7.3% in EU and OECD equities. Croatian corporates (1.9%) and global UCITS funds (3.6%) are also included, as are alternative investments including real estate (0.25%). 

“Since their inception in 2002, Croatian pension funds have fulfilled their role successfully and are producing satisfactory returns,” said Štimac. 

Depending on the investment and risk categories – active, balanced and conservative – which were introduced in 2014, funds have achieved annual returns of over 5% on average since inception. 

“The current government, both during the campaign as well as after the government was formed, has spoken positively about the second pillar, going as far as suggesting contributions towards the second pillar shall increase when circumstances allow it. Croatia hopefully won’t take the path of Hungary or Poland”
Dubravko Štimac

The regulatory aim was 2% above inflation which stands at 2.2% annualised over the last 15 years. 

However, Štimac confirms that pension funds would like the opportunity to invest in new asset classes: “We would like to invest into infrastructure projects (such as the highway monetisation) and energy projects.” 

A previous government, under Zoran Milanović, had announced plans to include pension funds in public-private partnership (PPP) financing projects for a toll motorway but later backtracked. 

Prior to the recent elections, the HDZ had noted it did not want to pursue the initial public offering of the state-owned company running the motorways but Štimac has seen “some signs pointing in a different direction”. 

It remains to be seen what the new government will decide. Similarly, Štimac confirms a first round of talks with the new cabinet on minor changes relating to pension payment plans and fees. 

“However, no major changes were suggested or discussed. We also do not believe any major changes are currently necessary,” he adds. 

Around the Balkans


• A voluntary supplementary pension pillar is about to be set up in Republika Srpska, one of two separate entities in Bosnia and Herzegovina.
• The Federation of Bosnia and Herzegovina, the other entity, is expected to amend its tax laws to make it possible for employees to pay into the RS pension fund or a similar vehicle.
• The Republic of Srpska Pension Reserve Fund faces significant reinvestment risk.

From 2018, the Republika Srpska (RS), one of two separate entities making up Bosnia and Herzegovina (BiH), will introduce a voluntary supplementary element to its pension system. 

“We are in the last stages of finalisation after three years of planning and negotiation,” Saša Stevanović, chief investment officer at the €130m Republic of Srpska Pension Reserve Fund (PREF), confirms.

Initially, a single fund will be set up with one asset manager. This is currently being established. It will be co-owned by PREF, the European Bank for Reconstruction and Development (EBRD) and the Slovenian asset manager Skupna pokojninska druzba. The latter will own 34%. The others will each hold 33%. 

Stevanović explains the set-up: “People in our country do not like to trust institutions with their money but the EBRD has a good reputation and can help us to build long-term trust.” 

The PREF was set up in 2011 to help finance the first pillar and has since returned an annualised performance of 5.7% – mainly because of high-yielding, long maturity government bonds. 

“We are facing major reinvestment risks,” says Stevanović. “Our steps to decrease equity exposure while saving value in the portfolio have led to a 30% fixed income exposure which will mature in the next three years.” One problem is the weak local stock market. The Banja Luka Stock Exchange lost 25% in the four years to 2015 and this trend has continued with a further estimated 15% loss for 2016. 

The new voluntary fund will face the same problems but Stevanović confirms it will be able to invest in foreign equities. “Over the next few years, however, I think it will only invest in government bonds and stocks of Telekom RS because this yields a 10% dividend,” the CIO says. 

It remains to be seen how fast this vehicle will grow as it is voluntary, but all employees can pay into the pension fund without age limit and irrespective of their employment sector. Employers can decide to top up their employees’ payments and for each €50 the government offers tax incentives on €30. 

Further growth might come from the other entity that makes up BiH – the Federation of Bosnia and Herzegovina (FBiH) – which applied for EU membership in February 2016. 

The FBiH is expected to amend its tax laws to make it possible for employees to pay into the RS pension fund – or a similar vehicle. “I expect another provider to enter the market, but while competition is good I think two is enough for this small market,” says Stevanović. In total, 700,000 people are employed in BiH. However, there might be further fragmentation: “Groups like doctors or lawyers might decide to set up their own funds.” 

Staff at PREF will raise awareness for the need to make additional savings for retirement. The tax incentive might also help. However, over the short term this might strain the budget even further. According to the World Bank, public spending on pensions (first pillar) is already one of the highest in the region at 10.2% of GDP, “driven by early retirement and privileged pension schemes”. 


• Slovenia ranks poorly in terms of the sustainability of its pension system.
• A pensions commission has drafted a white paper on possible reform.
• In the second pillar a life-cycle model was introduced to the voluntary sector in 2016. 

Some CEE countries are facing problems with their pension systems because they introduced the World Bank system in the 1990s. They implemented the bank’s three-pillar pensions model but did not implement an increase in the statutory retirement age. In contrast, Slovenia is suffering because it did not adopt the model. 

The entire Slovene supplementary pension system had total assets of €2.4bn in the autumn of 2016. 

In the latest Allianz Pension Sustainability Index, Slovenia ranks only slightly better than China and Thailand, at the bottom. “Slovenia has low rankings in all three categories we apply: demographic developments, public finances and pension system design,” says Michela Coppola, senior economist for international pensions at Allianz in Munich. 

“The second pillar in Slovenia is small and only mandatory for civil servants – for which the contribution rate has shrunk – and for people in dangerous professions – which use the second pillar mainly to bridge the period from their effective retirement until they reach the statutory retirement age,” the report  says.

Coppola says it is positive that Slovenia has put together a pension commission that has drafted possible reforms. “It is remarkable that all stakeholders, including the unions, agree that Slovenians need supplementary pension savings,” she says. But she adds: “Even if reform proposals were made next year [2017] we would only see the effects much later and the government already has to pay one-third of first-pillar pensions from the state budget rather than contributions.” 

Damir Verdev, executive director at PRVA osebna zavarovalnica, a pension company operating in Slovenia, confirms that although there were talks when the white paper came out, “since then not much has happened”. 

“The idea of introducing a mandatory pillar for all employees was touched upon, but the report does not see the financial resources for this and the contribution into the pay-as-you-go system cannot be lowered, as there would not be enough money for current pensioners,” he explains.

In the second pillar, a life-cycle model was introduced to the voluntary sector, which makes up about half of the supplementary pension assets in the country. ‘Dynamic’ funds can invest 70% in global equities and returned 11% in the first three quarters of 2016. The funds with the least risk only have about 7% in equities and 50% in bonds, with a guaranteed 4% return. 

Republic of Macedonia

• A political crisis has stalled plans for the reform of the only two mandatory pension funds.
• The pensions deficit looks set to surge.
• The IMF has recommended the raising of the statutory retirement age and increased first pillar contribution rates. 

A political scandal involving the former government wire-tapping the opposition has paralysed Macedonia in a political crisis lasting two years. This was set to be resolved with elections in December 2016. 

Meanwhile, all possible reforms of the pension system or the investment regulations for the only two mandatory pension funds have stalled. 

The International Monetary Fund (IMF) predicted in October 2016 that: “The pension deficit, which is sizable at 4.5% of GDP, is projected to more than double by 2030 without further reforms.” It recommended the raising of the statutory retirement age and increased first-pillar contribution rates. 

The second pillar, which is not mentioned by the IMF, covers 420,000 of the estimated 720,000 employees in the country. The €400m KB First pension fund has returned 5.57% since it was estalished in 2006. Its competitor, the €350m NLB pension fund, returned 5.31% annualised over the same period. There is also a segment of voluntary third pillar savings but assets total only €15m. 

Janko Trenkoski, a former board member at KB First and now an independent investment adviser, says: “The pension system in Macedonia as a result of the latest political and economic developments is in dire need of reset. The new government should establish an independent commission on pension reform, supported by all major parties, to review and make recommendations to achieve the goals of stable, predictable and adequate income security throughout retirement.”