Pension Funds’ Obligations to Invest in Government Debt Decrease, While Real Estate Opportunities Open Up

Amendments to the Law on Mandatory Pension Funds, which have raised significant public concern, primarily due to the establishment of a secretive alternative investment fund with a government guarantee into which pension funds must invest at least five percent of their assets, have finally been published in the Official Gazette.

In brief, the final solution brings new requirements for pension companies regarding adherence to sustainability principles, i.e., green investments, but it also introduces additional liberalization of investments, particularly a reduction in investments in government bonds. It is worth noting that (overly) large investments in government debt have long been a favorite target for some critics of the pension system.

Funds in the most numerous category B, which according to the latest data from the Croatian Financial Services Supervisory Agency (Hanfa) has 1.8 million members, no longer have to invest 50 percent of their assets in domestic government bonds, as this threshold is lowered to 45 percent. According to Hanfa’s data for the end of November, pension funds in category B have almost 52 percent of their assets in government bonds. Along with the aforementioned five percent of assets in the alternative investment fund with a return guarantee, the ceiling for investments in domestic and foreign stocks remains the same, at a maximum of 40 percent of assets. However, the share of assets that can be invested in open investment funds, both domestic and foreign, has increased from 30 to 35 percent.

Up to 10 percent in ‘concrete’

Pension funds in category B will also be able to invest directly in real estate, initially up to four percent of their assets, and if the fund reaches this threshold five years after the amendments come into effect, it can increase investments to seven percent, provided that the pension company has experts monitoring the value movements of the real estate portfolio. If indirect exposure is included, through shares of companies engaged in the real estate business, the total exposure to this favored investment class in Croatia can amount to up to 10 percent.

For pension funds in category A, which are more exposed to stocks, the ceiling increases from 65 to 70 percent, while the share of assets that must be invested in government bonds decreases from 30 to 25 percent. Additionally, instead of the previous 30 percent, pension funds in category A will be able to invest up to 45 percent of their assets in open investment funds. The nominally safest category C, which until now could only be exposed to government bonds to protect the assets of members who have less than five years until retirement, will have to invest at least 60 percent of its assets in this type of security from January 1, 2024, instead of the previous 70 percent.

Although category C funds still cannot invest directly in stocks, a new provision allows them to invest up to 10 percent of their assets in shares of exchange-traded funds (ETFs), whose primary and predominant goal is to achieve indirect exposure to stocks.

Good Results in 2023

With additional liberalization, the legislator aims to stimulate the returns of mandatory pension funds through these amendments. It is worth recalling that Finance Minister Marko Primorac stated at the end of November that pension funds could have achieved much more significant results. He added that they were also faced with external influences that partially hindered them, as well as restrictions on what they are allowed to invest in. As for this year, pension funds have achieved very good results, mainly erasing last year’s losses.

Thus, category A achieved a return growth of 14.6 percent, category B of 10 percent, and category C of just under four percent, according to data from Hrportfolija.