Minister Denies Nationalisation of Private Account Pension Pillar

By 29 June 2018

ZAGREB, June 29, 2018 - Labour and Pension System Minister Marko Pavić reiterated on Thursday that the government did not plan to nationalise the second pension pillar but was rather proposing that investments in that pillar be increased and was willing to accept possible better proposals.

We want to ensure higher pensions for young people who will be investing in the second pension pillar for a large part or all of their working life, Pavić told a news conference at his ministry. The second pillar are obligatory private pension accounts.

He said that the government proposed increasing the current, 5% allocation for the second pension pillar by 0.5% as of 2020 and by another 0.5% as of 2022, which would result in the allocation for that pension pillar amounting to 6%.

Pavić said that the government planned additional improvements of the second pension pillar which it had developed with pension funds and other stakeholders.

Once a worker meets conditions for retirement, they will be able to choose if they want to keep their pension savings in the mandatory pension fund or transfer them to the Croatian Pension Insurance Institute (HZMO). Of 900,000 Croatian employees born after 1962, 600,000 have had an average or below-average salary and they will have low pensions, while 300,000 of them will have almost no pensions at all. On average, people who will retire in the next 15 years will have pensions that will be 16% lower than pensions received by current pensioners who saved in the first pension pillar.

Those who are retiring now will have pensions that are 500-600 kuna lower than current pensioners' pensions and that is what the 27% allowance is about, he said.

Pavić said that according to projections for the period until 2040, the introduction of a 27% allowance for pensioners from both pension pillars would increase expenses by close to 40 billion kuna. The reason for the lower pensions is the short period of investment and the fact that the investment rate was never increased, he added.

"To solve that problem, we have a few options – one is to do nothing, which has been the case so far and resulted in growing differences between pensions; the second one is to take a 40 billion loan kuna, which would be irresponsible, and the third is to offer the right of choice so that people retiring decide at the moment when they retire if they want to choose the more favourable option and transfer their pension savings from the second pension pillar to the HZMO or keep them in their mandatory pension fund," said Pavić.

"In reality, the pension system reform is a conflict of generations, that is, a conflict of interests of those who have retired and want higher pensions right now and future pensioners who want to have decent pensions in the future," said the minister.

Commenting on accusations from former pensions system minister Mirando Mrsić, Pavić said that the problem had existed also during Mrsić's term in office, yet he did not solve it but rather made it worse by deciding to transfer pensioners with an accelerated retirement scheme into the second pension pillar.

The main problem is that the average number of years of service is 30 years and we want to encourage workers to remain on the labour market longer so as to ensure the pension system's sustainability and adequacy, said Pavić.