The future of Croatia’s pensions is up for discussion.
At the end of November, mandatory pension funds had in their accounts about 74 billion kuna, which includes about 18.4 billion kuna which they have themselves earned by investing in government bonds and shares of private and public companies. For every four kuna which citizens have invested in their retirement accounts, the so-called second pillar of the pension system (individual private accounts) earned them one additional kuna. In the first pillar, which includes money paid into the state budget, there is no profit. Actually, the difference between the money paid in by obligatory employee contributions and the money needed to pay out pensions to current retirees is getting larger and larger. Currently, the difference stands at about 17 billion kuna a year, which cannot be covered by about six billion kuna of annual payments into the second pillar which Ivan Lovrinović, one of the economic strategists of MOST, insists on sending directly to the first pillar and the budget, reports Vecernji List on January 19, 2016.
Prime Minister-designate Tihomir Orešković has a different idea, which is to use the pension funds in order to reduce public debt and accelerate privatization process. The model is based on the swap of government bonds with state assets. Some of the debt incurred by issuing government bonds would be paid with shares of state-owned companies. It is too early to talk which companies would be included in this process, but in principle it is an idea which could be acceptable to both the government and pension funds.
The state has shares in more than 500 different companies, so there are many possible options, while pension funds claim that it is in their interest to have as few bonds as possible and that they want to own shares in companies. However, they note that the implementation of the plan will depend on the details. Pension funds currently have about 70 percent of their assets in government bonds, which are valued at about 52 billion kuna, and the plan is to reduce this share to just over 55 percent. This would mean that between 10 and 15 billion kuna could potentially be freed up for privatization process.
In addition to shares of existing companies, money in pension funds could be used to develop new projects, such as large power plants. The idea of exchanging bonds for shares is nothing new. Something similar was being discussed in connection with the monetization of Croatian motorway system, but the project was abandoned before any details could be discussed.
The list of potential projects is really long. According to recent estimates by the Office for State Property Management, the value of shares in the state portfolio is around 50 billion kuna. A large part of the portfolio could be sold to pension funds and later they would sell these shares to private buyers trying to achieve greater profits than they can achieve by keeping government bonds.
