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OVERVIEW OF THE PENSION OVERVIEW OF THE PENSION REFORM IN THE REPUBLIC OF REFORM IN THE REPUBLIC OF CROATIA AND CROATIA AND FUTURE PERSPECTIVES FUTURE PERSPECTIVES Snjezana Balokovic Snjezana Balokovic Ankara Ankara March, 2011 March, 2011 . . SSCSSR SSCSSR - - IPA 2008 IPA 2008
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OVERVIEW OF THE PENSION REFORM IN THE REPUBLIC OF … · Pension reform Pension reform objectives were : higher level of pensions , introduction of different ways of financing, reduction

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Page 1: OVERVIEW OF THE PENSION REFORM IN THE REPUBLIC OF … · Pension reform Pension reform objectives were : higher level of pensions , introduction of different ways of financing, reduction

OVERVIEW OF THE PENSIONOVERVIEW OF THE PENSIONREFORM IN THE REPUBLIC OF REFORM IN THE REPUBLIC OF

CROATIA ANDCROATIA ANDFUTURE PERSPECTIVESFUTURE PERSPECTIVES

Snjezana BalokovicSnjezana Balokovic

AnkaraAnkara March, 2011March, 2011..

SSCSSRSSCSSR -- IPA 2008IPA 2008

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Old pension systemOld pension system

PPAYAY--ASAS--YOU GO defined benefit system based on YOU GO defined benefit system based on BismarckianBismarckian tradition with broad coverage characterized tradition with broad coverage characterized by following featuresby following features::

�� demographic problems (aging of population, low birth demographic problems (aging of population, low birth rates)rates)

�� pension system as a refuge for unemployment problemspension system as a refuge for unemployment problems�� drastic decrease of dependency ratiodrastic decrease of dependency ratio�� low retirement age (oldlow retirement age (old--age pension 60/55, early age pension 60/55, early

retirement 55/50)retirement 55/50)�� too generous replacement rates due to calculation of too generous replacement rates due to calculation of

benefits on the basis of 10 best yearsbenefits on the basis of 10 best years�� too broad definition of invalidity and related pension too broad definition of invalidity and related pension

rightsrights

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PensionPension reformreform

Pension reform objectivesPension reform objectives werewere::

�� higher level of pensionshigher level of pensions,,

�� introduction of different ways of financing,introduction of different ways of financing,

�� reduction of public system expenditures, reduction of public system expenditures,

�� rere--establishment of longestablishment of long--term sustainability, term sustainability,

�� harmonization of pension system with economic and harmonization of pension system with economic and demographic tendencies, demographic tendencies,

�� increasing of individual responsibility for oneincreasing of individual responsibility for one’’s own s own social securitysocial security,,

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PensionPension reformreform

�� The reform was The reform was devideddevided to to two stepstwo steps::

PARAMETRIC REFORMPARAMETRIC REFORM and and SYSTEMIC SYSTEMIC REFORMREFORM

�� Parametric reform had started with changes in the IParametric reform had started with changes in the I pillar pillar -- Pension Insurance ActPension Insurance Act past the procedure and entered past the procedure and entered into force from the beginning of 1999, as well as into force from the beginning of 1999, as well as Act on Act on Maximum PensionMaximum Pension

�� Systemic reform Systemic reform had had started with modestarted with modellling of the II and ling of the II and III pillar III pillar

�� Act on Compulsory and Voluntary Pension FundsAct on Compulsory and Voluntary Pension Funds�� Act on Pension Insurance Companies and Pensions Act on Pension Insurance Companies and Pensions

Based on Individual Capitalized SavingsBased on Individual Capitalized Savings

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Outline of current pension systemOutline of current pension system

From the beginning of 199From the beginning of 19999Mixed publicMixed public --private system private system based on 3 pillars:based on 3 pillars:

DB schemeDB scheme –– PAYPAY--ASAS--YOUYOU--GO GO –– I pillar (from 1 I pillar (from 1 January 1999)January 1999)

DC schemeDC scheme –– funded funded –– II pillar (from 1 January II pillar (from 1 January 2002) 2002) compulsorycompulsory

DC schemeDC scheme –– funded funded –– III pillar (from 1 January III pillar (from 1 January 2002) 2002) voluntaryvoluntary

I. II. III.

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Outline of current pension systemOutline of current pension system

�� II pillar II pillar –– Mandatory, Funded, DC Mandatory, Funded, DC �� mandatory for individuals under 40 years of agemandatory for individuals under 40 years of ageindividuals between 40individuals between 40--50 can choose 50 can choose

�� individuals over 50 remain in individuals over 50 remain in I I pillar pillar

�� membership only within one MPFmembership only within one MPF

�� III pillar III pillar -- Voluntary, Funded, DCVoluntary, Funded, DC�� no age limitno age limit

�� membership within several VPFmembership within several VPF

�� oopenpen--end pension fundsend pension funds

�� closedclosed--end pension funds (employers, TU)end pension funds (employers, TU)

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Outline of current Outline of current DB DB systemsystem

�� Pensioners: Pensioners: 1.1.203.564203.564

�� Insurees: Insurees: 1.1.463.418463.418

�� DependancyDependancy ratio: ratio: 1.1.22 22 (in January 2011 according to CPII data)(in January 2011 according to CPII data)

�� Big number of special Big number of special cathegories cathegories ((war veteranswar veterans, , Croatian army, Police Croatian army, Police and and JudiciaryJudiciary officials, representatives in Croatian officials, representatives in Croatian ParliamentParliament and and those who are working in dangerous jobsthose who are working in dangerous jobs))

�� Replacement rate Replacement rate 3939..6868%,%, but in case of 40 but in case of 40 years of insuranceyears of insurance 59.00%59.00%

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Population of the Republic of CroatiaPopulation of the Republic of Croatia

762.907762.907465.588465.588297.319297.319Population Population over 65over 65

2.710.1092.710.1091.360.8181.360.8181.349.2911.349.291Population Population between 20 between 20 and 64and 64

TOTALTOTALWOMENWOMENMENMENPOPULATION POPULATION IN 2008IN 2008

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Organizational structure of DB systemOrganizational structure of DB system

�� Croatian Pension Insurance InstituteCroatian Pension Insurance Institute(public institution with the status of legal person with (public institution with the status of legal person with public authority in respect of giving pension insurance public authority in respect of giving pension insurance decisions)decisions)

�� Ministry of theMinistry of the Economy, Labour and Economy, Labour and EntrepreneurshipEntrepreneurship (supervises the (supervises the implementation of laws and other legal regulations, implementation of laws and other legal regulations, responsible for legislation proposals)responsible for legislation proposals)

�� Ministry of FinanceMinistry of Finance (tasks related to analyses (tasks related to analyses and forecast of macroeconomics trends, monitoring of and forecast of macroeconomics trends, monitoring of trends in pension insurance systemtrends in pension insurance system))

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Financing of DB systemFinancing of DB system

�� Employee pays the contribution rate of Employee pays the contribution rate of 20%20% of the wage (if he/she is insured only of the wage (if he/she is insured only under the I pillar)under the I pillar)

�� Or Or 15%15% of wage if additionally insured of wage if additionally insured under the II pillarunder the II pillar

�� Employer allocates the contribution rate on Employer allocates the contribution rate on his/her behalfhis/her behalf

�� Tax authorityTax authority collects the contributionscollects the contributions

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EMPLOYEESTAX

AUTHORITY

CROATIANPENSION

INSURANCE INSTITUTE

CURRENT PENSIONERS

contribution rate20%

Contribution paying scheme within Contribution paying scheme within PAYPAY--GO systemGO system

contribution rate15%

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PAYPAY--GO systemGO system

Insured personsInsured persons�� Employees and other deemed as suchEmployees and other deemed as such�� Salaried civil servantsSalaried civil servants�� Full time volunteers and apprenticesFull time volunteers and apprentices�� Unemployed persons according to the employment lawsUnemployed persons according to the employment laws�� Top sportsmenTop sportsmen�� Monks, priests, other clericsMonks, priests, other clerics�� Members of management boardsMembers of management boards�� Croatian citizens employed abroadCroatian citizens employed abroad�� Foreign citizens and stateless personsForeign citizens and stateless persons

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PAYPAY--GO systemGO system

Types of pension:Types of pension:�� OldOld--age pensionage pension (65/60 years of age and 15 (65/60 years of age and 15

years of qualifying period)years of qualifying period)�� Anticipatory pensionAnticipatory pension (60/55 years of age and (60/55 years of age and

35/30 years of qualifying period)35/30 years of qualifying period)�� Disability pensionDisability pension (based on total or (based on total or

occupational disability)occupational disability)�� SurvivorsSurvivors׳׳ pensionpension (widow, widower, children)(widow, widower, children)�� First pillar First pillar basic pensionbasic pension (in case that person is (in case that person is

entitled also to the II pillar pension)entitled also to the II pillar pension)

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PAYPAY--GO systemGO system

�� Minimum pensionMinimum pension (entitlement if regularly (entitlement if regularly determined pension is lower;determined pension is lower; defined in a value per year defined in a value per year and multiplied by the number of years of the qualifying and multiplied by the number of years of the qualifying period completed)period completed)

�� Maximum pensionMaximum pension (regulated by special law, per (regulated by special law, per yearyear determined as 3.8 of average value point per year)determined as 3.8 of average value point per year)

�� Indexation of pensionsIndexation of pensions (twice a year according (twice a year according to the Swiss formula to the Swiss formula –– 50% of the average cost of living/ 50% of the average cost of living/ and 50% of average gross salary)and 50% of average gross salary)

�� Pension formulaPension formula (point system (point system –– personal points personal points x pension factor x actual pension value)x pension factor x actual pension value)

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Outline of current compulsoryOutline of current compulsory DC DC systemsystem

4 compulsory 4 compulsory pension fundpension fundss

Raiffeisen OMF

30,87%

PBZ/CO OMF

17,78%

Erste PlaviOMF

15,38%

AZ OMF

35,97%

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Outline of current compulsoryOutline of current compulsory DC DC systemsystem

Membership/net assetMembership/net asset�� 1.1.561561..454454 members of the fundsmembers of the funds

�� contribution rate 5% of wagecontribution rate 5% of wage

�� net assets 3net assets 377..33 billion HRKbillion HRK

Total assets investment structureTotal assets investment structure�� domestic assets 88.21%domestic assets 88.21%

�� foreign assets 11.79%foreign assets 11.79%

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Outline of current compulsoryOutline of current compulsory DC DC systemsystem

Investment structure within domestic Investment structure within domestic assetsassets

�� Securities and deposits 86.97%Securities and deposits 86.97%

�� Shares 16.77%Shares 16.77%

�� Government bonds 62Government bonds 62..69%69%

�� Cash 0.57%Cash 0.57%

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Outline of Voluntary DC systemOutline of Voluntary DC system

Raiffeisen ODMF

25,97%

Erste Plavi Protect ODMF

4,67%

Erste Plavi Expert ODMF

9,11%

Croatia osiguranje

ODMF 9,91%

AZ profit ODMF38,76%

AZ benefit ODMF11,58%

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Outline of Voluntary DC systemOutline of Voluntary DC system

6 open6 open--end pension fundsend pension funds

�� 117070..859859 members of the fundsmembers of the funds

�� net assets 1.net assets 1.55 billion HRKbillion HRK

Total assets investment structureTotal assets investment structure

�� domestic assets 86.55% (domestic assets 86.55% (securities and securities and deposits 84.07%, shares 13.63%, government deposits 84.07%, shares 13.63%, government bonds 48.95%, cash 1.97%)bonds 48.95%, cash 1.97%)

�� foreign assets 13.45%foreign assets 13.45%

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Outline of Voluntary DC systemOutline of Voluntary DC system

Rates of returnRates of return

((percentualpercentual difference between the value of difference between the value of its unit of account on the last day of the its unit of account on the last day of the reporting period and this unit value oreporting period and this unit value off the the last day of the previous period) last day of the previous period)

annualized since start of businessannualized since start of business

from 2.72% to 9.68%from 2.72% to 9.68%

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Outline of Voluntary DC systemOutline of Voluntary DC system

15 closed15 closed--end pension fundsend pension funds�� 17.17.577577 members of the fundsmembers of the funds

�� net assets 2net assets 29393 mil HRKmil HRK

�� investment policy limited investment policy limited

�� rates of return (annualized since start of rates of return (annualized since start of business) from 1.17% to 15.53%business) from 1.17% to 15.53%

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Organizational structure of DOrganizational structure of DCC systemsystem

�� Compulsory/voluntary pension fundsCompulsory/voluntary pension funds

�� Compulsory/voluntary pension companiesCompulsory/voluntary pension companies

�� Pension insurance companiesPension insurance companies

�� Regulatory and supervisory body Regulatory and supervisory body –– Croatian Croatian Financial Services Supervisory AgencyFinancial Services Supervisory Agency

�� Central Registry of AffiliatesCentral Registry of Affiliates (only for the (only for the compulsory system)compulsory system)

�� Tax Authority Tax Authority (collect(collectss the contributions)the contributions)

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Outline of Voluntary DC systemOutline of Voluntary DC system

Contribution paying schemeContribution paying scheme

GROSS SALLARY(WAGE)

contributions20%

to the TaxAuthority

I PILLAR15%

II PILLAR5%

CPII

CRACOMP/

VOLUNTARY PENSION

FUNDS

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Outline of Voluntary DC systemOutline of Voluntary DC system

�� Steadily growing numberSteadily growing number

�� NoNo single organisation keeping records for III pillar single organisation keeping records for III pillar schemesschemes

�� Tax preferential treatment Tax preferential treatment for fund membersfor fund members::

�� Income tax reliefIncome tax relief (up to (up to 66.000 .000 HRKHRK per year)per year)

�� State subsidiesState subsidies (15% of total contribution per year)(15% of total contribution per year)

�� New: incentives for closedNew: incentives for closed--end pension plan end pension plan sponsorssponsors (payments for voluntary savings below 6.000 HRK per year are (payments for voluntary savings below 6.000 HRK per year are exempt from paying taxesexempt from paying taxes))

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II PillarII Pillar CostsCosts

�� Centralization of the system with one Centralization of the system with one institution for collecting of contributions institution for collecting of contributions ––Tax Authority and one Tax Authority and one ““clearing houseclearing house””Central Registry of Affiliates, which keeps Central Registry of Affiliates, which keeps II pillar recordsII pillar records

�� Both central agencies are financed from Both central agencies are financed from the State budgetthe State budget

�� Costs should be lowerCosts should be lower because of because of centralized systemcentralized system

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Central Registry of Affiliates Central Registry of Affiliates

Responsibilities:Responsibilities:

�� registration and change of membershipregistration and change of membership

�� accepting and processing of Raccepting and processing of R--SmSm Form,Form,

�� managing and maintaining the Registermanaging and maintaining the Register

�� managing managing function of function of Central accounting Central accounting

�� recording data into the Registerrecording data into the Register

�� matchingmatching data to the related Pillar II paymentsdata to the related Pillar II payments

�� delivering data to other institutions,delivering data to other institutions,

�� communication with members of communication with members of CPFsCPFs

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II PillarII Pillar CostsCosts

Centralization of records:Centralization of records:

�� allows easy access to records,allows easy access to records,

�� reduces the need of moving records when reduces the need of moving records when contributors change providers,contributors change providers,

�� simplifies the calculation of the total simplifies the calculation of the total pension (from the two pillars)pension (from the two pillars)

�� there is no need for pension funds to know there is no need for pension funds to know the individual details of their clientsthe individual details of their clients

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II PillarII Pillar CostsCosts

The types of fees and their upper limits to be charged by The types of fees and their upper limits to be charged by the pension companies administering the compulsory the pension companies administering the compulsory pension funds according to the law:pension funds according to the law:

�� Entry feesEntry fees should not exceed 0.8should not exceed 0.8%% of the contributions of the contributions paidpaid

�� Management feesManagement fees (net asset value fees) should not (net asset value fees) should not exceed 1.2 percent of the total assets per year according exceed 1.2 percent of the total assets per year according to the Actto the Act

�� byby--laws of the Croatian Financial Services Supervisory laws of the Croatian Financial Services Supervisory Agency have set a lower rateAgency have set a lower rate (0.65% (0.65% inin 2011)2011)

�� Exit feesExit fees should be paid if a member switches from the should be paid if a member switches from the fund within the first three years of membershipfund within the first three years of membership 0.80.8 %%of of the total amount of the memberthe total amount of the member’’s personal account in the s personal account in the first yearfirst year, , 0.40.4%% in the second year and 0.2 in the second year and 0.2 %% in the third in the third yearyear

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Government Economic RecoveryGovernment Economic RecoveryProgramProgram

Regarding DB pension systemRegarding DB pension system

�� Amendments to the Pension Insurance Act (1 Amendments to the Pension Insurance Act (1 November 2010) entitlements from DB scheme November 2010) entitlements from DB scheme should be equal for men and women should be equal for men and women (Constitutional Court Decision) (Constitutional Court Decision) –– 65 years of age 65 years of age (for old(for old--age pension) gradually in 20 yearsage pension) gradually in 20 years

�� Retirement age for early retirement also Retirement age for early retirement also gradually increased for women (gradually increased for women (60 years of age 60 years of age gradually in 20 years)gradually in 20 years)

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Government Economic RecoveryGovernment Economic RecoveryProgramProgram

�� Pension amount for early retirement pension Pension amount for early retirement pension appropriately reduced in relation to years of appropriately reduced in relation to years of insuranceinsurance

�� Changes in the pension scheme for special Changes in the pension scheme for special cathegoriescathegories, decreasing the amount of pension , decreasing the amount of pension for 10%for 10%

�� Gradually suspension of Gradually suspension of ““privilegedprivileged”” pensionspensions�� Suspension of pension adjustment for 2010 and Suspension of pension adjustment for 2010 and

20112011

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Government Economic RecoveryGovernment Economic RecoveryProgramProgram

Regarding DC pension schemeRegarding DC pension scheme

�� Increasing the contribution rate for II pillarIncreasing the contribution rate for II pillar

�� Reducing the administrative costs by reducing Reducing the administrative costs by reducing fees fees

�� Changing of the basic pension formulaChanging of the basic pension formula

�� Supplement on the pension (equal to the Supplement on the pension (equal to the supplement on the pension acquired according supplement on the pension acquired according to the Pension Insurance Act or proto the Pension Insurance Act or pro--rata rata supplement)supplement)

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Future perspectives in generalFuture perspectives in general

�� Insure adequacy and sustainabilityInsure adequacy and sustainability�� Challenge for policy makers is to aim for a good Challenge for policy makers is to aim for a good

balance between sustainability and adequacybalance between sustainability and adequacy�� Strengthen the awareness of available routes to Strengthen the awareness of available routes to

adequate income in retirementadequate income in retirement�� Although the economic crisis and possible lower Although the economic crisis and possible lower

economic growth will make this hardereconomic growth will make this harder

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Future perspectives in generalFuture perspectives in general

�� Reviewing the degree of financial market Reviewing the degree of financial market exposure and the design of risk sharing in exposure and the design of risk sharing in funded pension systemsfunded pension systems

�� Introducing special schemes according to the Introducing special schemes according to the younger/older cohortsyounger/older cohorts

�� Achieving better balance forAchieving better balance for pension severs and pension severs and pension providerspension providers between risks, security and between risks, security and returnsreturns

�� Enhance public confidence in funded schemesEnhance public confidence in funded schemes

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Thank you for your attentionThank you for your attention

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