CROATIA. Andrija Hren and Damir Ćukman, Erste Pension Fund. Introduction

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1 CROATIA Andrija Hren and Damir Ćukman, Erste Pension Fund Introduction In the early nineties Croatia began its transition from a centrally planned economy to a free market. Soon after declaring its independence from Yugoslavia, Croatia entered a war that added pressure on an already fundamentally different demographic situation from those that have been a reality when previous pension reform occurred. To be more specific, it was clear that population was ageing. The ratio of working people to people that are receiving pension benefits started to decrease, and when the war finished, there was a strong increase in pension benefit users. It was clear that the current pension system that was based on intergeneration solidarity was unsustainable. Generally speaking, a pension system relying on intergeneration solidarity is based on taxing current income of working people to pay for the pension liabilities of current pension benefit users. Therefore, a decreasing ratio of working population to benefit users creates a structural problem. In 1999, Croatia started to prepare a new pension system that would address the problems arising from its aging population structure. The new system was based on three pillars. Each of the pillars was supposed to contribute to future pension liabilities. The first pillar is still based on intergeneration solidarity as described in previous chapter. The second pillar was designed as a defined contribution pension plan and is obligatory to most of the current working population. The third pillar is supposed to offer additional investment opportunities to people that would like to invest in their future pension assets. It is completely voluntary but was initially encouraged through government incentives. Market structure Mandatory pension funds Total assets under management are a little over 5 billion EUR. Four mandatory pension funds are currently operating in Croatia and the market is divided among them. The biggest fund is AZ mandatory pension fund with a market share of almost 40%, followed by Raiffeisen mandatory pension fund at 30% and PBZ CO at 17%, with Erste Plavi being the smallest with a 13% market share. The market shares have changed very little since In 2008 the active sales of mandatory pension funds was stopped and since then over 90% of pension fund members do not choose a fund by themselves at initiation of employment and are then automatically assigned a fund according to current market share.

2 Raiffeisen OMF 30,15% AZ OMF 39,65% PBZ/CO OMF 16,90% Erste Plavi OMF 13,31% Open ended voluntary pension funds Total assets under management are a little over 200 million EUR. There are six open ended voluntary pension funds operating in Croatia. As can be seen in the market structure graph below, the largest fund AZ Profit has a market share of about 40% while the smallest of the six funds, Erste Plavi Profit has a market share of about 2%. Raiffeisen ODMF 36,06% AZ benefit ODMF 7,92% Erste Plavi Protect ODMF 2,35% AZ profit ODMF 40,66% Erste Plavi Expert ODMF 6,32% Croatia osiguranje ODMF 6,68% Investment universe and limits Our investment universe comprises of equity and fixed income securities listed on official exchanges of EU member states of OECD countries provided that such countries have a longterm credit rating for debt in foreign currency at least equal to the rating of the Republic of Croatia according to Standard & Poor's or Moody's agencies. Derivatives can only be used for hedging purposes, not for adding exposure. Mandatory pension funds are required to hold at least 50% of their assets in debt securities issued by the Croatian government. After Croatia completes its accession to the European Union this limit should be modified to include debt securities from all EU member states. A maximum of 30% of assets can be invested in fixed income securities including municipal, corporate or commercial paper of domestic or international issuers as well as government debt of foreign countries. A maximum of 20% of assets may be invested in short term debt securities. 30% of the assets may be invested in equities, and also 30% in open end and closed end investment funds. 30% percent of the assets may be hedged thorough the use of some derivative instruments. The limitations listed above are only general holding limits, mandatory and voluntary

3 pension funds in Croatia are subject to a number of specific limitations within the mentioned groups which are more technical in nature and may be found in the Ordinances and by laws proscribed by the Croatian Financial Services Supervisory Authority. Current asset allocation As of February of 2011 around 87% of total mandatory pension fund assets were invested in domestic securities. 62 percent of total fund assets were invested in Croatian government debt of various maturities and 16% were invested in stocks and GDRs of Croatian companies. About 13% of total fund assets were allocated to foreign securities with a majority of investments going into equity and open end investment funds with a smaller percentage being allocated to corporate bonds. The development of asset allocation from 2002, the year the funds were first established, shows a gradual decrease of government debt in the structure in favor of equity based investments which are more suited to the long term investment horizon of the funds. Still, as of the end of February 2011 only 22% of assets were allocated to equities which is in keeping with the balanced investment policy of the funds. Also it has to be mentioned that these are aggregate numbers for the entire industry, asset allocation across funds vary according to individual investment policies % 3% 3% 7% 22% Shares and GDRs Government bonds, Municipal bonds Closed end funds, Openend funds Short term securities, Deposits 2% 5% 6% Shares and GDRs Government bonds, Municipal bonds Closed end funds, Open end funds 64% Corporate bonds Cash and other 87% Short term securities, Deposits Open end voluntary pension fund asset allocation As of the end of February voluntary pension funds had 87% of their assets allocated to domestic securities with the remaining 13% of foreign assets allocated to shares and investment funds. The asset class 9% 8% 10% 3% 48% 22% Shares and GDRs Government bonds, Municipal bonds Closed end funds, Openend funds Short term securities, Deposits Corporate bonds Cash and other breakdown is somewhat different when compared to the mandatory pension funds with only 48% of assets allocated into government debt and almost 10% of assets invested in corporate bonds.

5 Investment returns If we look back at past performance of pension funds, we can see that the average result since inception measured by Mirex was around 5.4% with the best performing fund achieving an annual return of 5,72% and the worst performing fund achieving an annual return of 4,85%. Mandatory pension fund's annualised yield comparison since inception 5,80% 5,60% 5,50% 5,39% 5,38% 5,40% 5,72% 5,20% 5,00% 4,80% 4,85% 4,60% 4,40% MIREX PBZ CO OMF AZ OMF Raiffeisen OMF Erste Plavi OMF MIREX PBZ CO OMF AZ OMF Raiffeisen OMF Erste Plavi OMF Transition cost Although assets under management of mandatory pension funds grew significantly in recent years, majority of future pension liabilities will still have to be paid out from first pillar. Transition cost occurs as a result of current deficit that is crated in Croatia s budget because some of the tax revenues are redirected to pension funds rather than to the first pillar.

6 The role of pension funds in local market With current assets under management of around 37 HRK billion, mandatory pension funds are very important investors in both Croatia and in the region. They invest in Croatian government bonds and are active investors on equity markets. Unfortunately, as assets under management of pension funds continue to grow further, investment opportunities in Croatia become scarcer and pension funds are looking for more and more investments abroad. Public opinion Even though capitalism as an economic system has been chosen after the breakup of former Yugoslavia, there are still some citizens that do not take care of their savings for the retirement. As a result from this kind of behavior, there is a significant number of citizens that do not understand the basic principles of the pension system. This is especially apparent among younger population that just started their professional careers. Less than 10% of newly employed citizens chose their mandatory pension funds by their own. But as time passes, people will be more aware of their financial choices and will dedicate more time to understanding consequences of choices that they make and how they impact their future.

annual report 2009 Ericsson Nikola Tesla d.d. Equity cash, cash equivalents and financial assets Other current assets non-current assets liabilities

annual report 2009 Ericsson Nikola Tesla d.d. Equity cash, cash equivalents and financial assets Other current assets non-current assets liabilities FINANCIAL HIGHLIGHTS 2009 in MHRK, except per share amounts 2009 2008 2007 Profitability: Sales revenue 1,400 1,800 1,781 Gross margin 13% 17% 15% Operating profit 66 163 137 Profit before tax 127 212