The Paneuropean Pension Fund Could Increase the Competitiveness of Pension Funds in Croatia

It is no news that pensions in Croatia are low (around 40% of the average net salary) and that everyone who wants to think about a secure old age must already find a way to avoid the fate of the average retiree. The answer to this problem is, of course, savings, and since the beginning of the year, citizens have the option of investing in the Paneuropean Pension Fund (PEPP).

Namely, the recent approval from HANFA for citizens in Croatia to start offering the option to invest in PEPP was received by fintech company from Slovakia – Finax, which established a robo-advisory platform in 2018 and enables simple automated investment in index ETF funds with registration via a mobile application.

Finax held a conference today on this occasion, attended by Juraj Hrbatý, director of Finax, Tamara Vrhovec Sekač, country manager of Finax, Vedrana Pribičević, president of the Association of Members of Mandatory and Voluntary Pension Funds and a professor at the Zagreb School of Economics and Management, and Toni Milun, a mathematics professor and financial vlogger.

What is it really about?

Similar to Croatia’s third pillar, PEPP is voluntary savings, but can move with the saver and be transferred anywhere in the EU. It targets young people who often change their workplace. The main difference compared to voluntary pension funds is that this PEPP is offered as a portfolio managed by an investment company, while voluntary pension funds are managed by a pension fund management company. Also, funds are invested in investment funds traded on the stock exchange, i.e., in so-called ETFs (Exchange Traded Funds).

This program started in the EU at the beginning of this year, and Finax is currently operating this service in the Polish, Czech, and Hungarian markets, and since Croatia has adopted the laws necessary for the introduction of PEPP, it can now provide it to local clients.

– Croatians are among the first in Europe who can increase their pension savings through a new European pension product. We are launching it in the Czech Republic these days. We believe that more EU countries will soon join, and we plan to provide European pensions to clients from Poland, Hungary, Slovenia, and Romania by the end of this year – said Hrbatý.

– We aim to offer PEPP primarily to multinational companies and young people with business mobility across the European Union. Thanks to connected tax incentives and levies, PEPP will become our key product in several countries and will also help us establish ourselves in new markets – added Hrbatý.

Vrhovec Sekač, country manager of Finax, added that Finax’s idea is that savings lying in citizens’ banks can be invested and that investing is made available to people in the best possible way.

Competitiveness of the Pension System

Pribičević, who, along with Milun, is among the first investors in Finax in Croatia, welcomed the arrival of PEPP at the conference and expressed hope that it would stimulate the competitiveness of the pension system and perhaps ‘wake up’ the voluntary pension funds that are ‘trapped’ by Croatian regulations.

Because although savings in the third pillar have their advantages (tax benefits, state incentives, and fund returns), many believe that the investment strategy of pension funds is too conservative and too focused on the domestic market and burdened with excessively high fees. Therefore, the arrival of such competition should democratize the market and provide more options for small investors.

– PEPP is a pension product aimed at the upcoming generation, but not only them. With Croatia’s full integration into the European Union, workers have become mobile, so it is time for their pension savings to become mobile. This means that citizens of the European Union will be able to choose whether they want to leave their pension savings in the country where they worked or transfer it with them when they move to other parts of the Union – said Pribičević.

She added that people often do not invest in voluntary pension savings due to a lack of transparency. On the other hand, she states that PEPP is revolutionary precisely because it is considered transparent since everything is digitized and investors can always check where and how their money is invested.

– PEPP also offers a high level of transparency regarding costs and fees, limited investment costs, and guarantees capital after retirement, for example, by changing investment strategies to more conservative ones as the user approaches retirement. In this sense, the product is very welcome as a complement to traditional pension savings in the second and third pension pillars in a continent that is increasingly aging – said Pribičević.

Main Advantages of PEPP

Vrhovec Sekač highlighted that some of the main advantages of PEPP are that it is transferable within the European Union, which means it does not matter in which country the saver resides, and that Croatian savers have the benefit of saving from the day of birth, which allows them a very long investment horizon in which even a very small monthly deposit combined with compound interest will result in financial security in old age, and that they have the option to withdraw the entire amount of savings at the age of 55 or, in the case of long-term unemployment, have more flexibility in using their savings than was the case until now.

In addition, unlike the local third pillar, the European pension has very well-diversified portfolios composed of reputable equity and bond ETF funds that cover 80% of global markets.

Pribičević also added that an advantage is that PEPP is under constant supervision of European bodies and that Finax must use complex mathematical models to show the risk and potential increase in the value of the client’s savings, which makes it quite safe.

The Importance of Savings and Education

Milun highlighted several indicative data at the conference that indicate how necessary it is to start thinking about retirement income in time. He pointed out that according to the latest data, the average net salary in Croatia is around 1100 euros, while the average pension of those who retired this year is only 410 euros. That is why Milun emphasizes that all those who want to ‘buy something’ in retirement must take care of it now.

When asked how this is a better way to save than the voluntary pension pillar, he said that whatever system someone chooses for investment, every person should invest in their future. However, this – less conservative option – may be more attractive to young people.

However, considering the aforementioned average salary figure, the question arises as to who can afford to save for retirement in any form, including this Finax option? Milun pointed out that he sees great potential in PEPP for young people working in the IT sector because they have opportunities and are more open to such investments. However, he also emphasized that more needs to be done on education and raising awareness that instead of spending on unnecessary expenses, everyone can invest just 10 euros in savings.

– The perspective for young people in retirement is not bright, and long-term investment can work wonders. Young people should not be discouraged by the fact that they do not have much now; rather, we must educate them that if they can set aside even 10 euros, they will achieve a lot in the long run – added Vrhovec Sekač, while Pribičević concluded that it is important to encourage a culture of investing.