The compulsory pensions system, which started collections at the beginning of 2002, is open to workers up to 50 years and compulsory for those aged 40 and under. It is funded by 19.5% contribution of gross wages, of which a 5% portion is diverted into the compulsory second-pillar. There are no employer or government contributions. While there are certain differences between obligations on compulsory and voluntary pension funds - the former require 80,000 members after the end of two years of operating, the latter 2,000 – the original law on limits apply to both. These include:
o Minimum 50% of all assets to be invested into Croatian government and central bank long-term bonds.
o Maximum 5% limit on short-term government and central bank securities, and short-term bank deposits.
o Maximum 30% limit on domestic equity investment (restricted to stock and open-ended investment funds traded on the official list of the Zagreb Stock Exchange), long-term municipal and officially traded corporate securities.
o Overseas limit of 15% and restricted to OECD countries.
o Prohibited investments include real estate.
Derivatives, for hedging purposes only, will be allowed in 2003, along with a package of other legal changes, which most observers assume will be passed with little controversy. They include the abolition of the “success fee”, a feature of the Croatian and Uzbek pensions industries, which was 25% of real annual returns after costs. In return management and contribution fee caps will be raised from 0.8% to 1.2%. At the same time exit fees have been reduced to avoid members being locked in.
The performance return, currently calculated on a yearly basis, will be extended to three years. Certain investment limits will be changed under the legal proposals, including treating domestic equity and domestic open-ended investment funds as separate asset classes with their own limits of 30% and 15% respectively, and raising the cap on short-term treasury bills and bank deposits to 15%.
Crucially, investment limits for voluntary funds will be eased significantly: in future their only limit will be a 20% cap on overseas investment. Unlike the compulsory sector, the voluntary pension fund market has not taken off, with only one fund, by Raiffeisen, set up as of the beginning of 2003, while the others are waiting for additional changes, including removing the need, from the start, to set up a pension insurance company, the entity that will pay the annuities on retirement, and which second-pillar funds do not need to establish immediately. The insurance company requires an up-front capital commitment of HKR5m but only starts operating well down the line. “Actuarial statistics have shown that it will never be profitable,” says Vladimir Puskaric, assistant director at Hagena. The fund industry also hopes to see the minimum number of participants reduced from 2,000 to 200, which would make it more feasible for companies to set up occupational schemes, as would tax relief on corporate contributions.

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