Labour Minister Pavić Sends Retirement Reform to the Parliament, 27% Increase Hangs in the Air

The draft envisages a choice for new retirees between two pension models: one retains payments from both the 1^st and 2^nd insurance pillars, while the other is just the 1^st pillar, but with a 27-percent hike.

Yet, the Ministry has said to us it is continuing calculations on the fiscal sustainability of the model whereby the 27-percent boost would apply also to the citizens opting to retain both retirement pillars. Such a dual approach to retirement reform does not impress with its seriousness. It is obvious that the outcome will depend on the pressure of both the public in the debate and the interest groups.

Greater contribution

Let us recall: the combined pension from the 1^st and 2^nd pillars, without the 27-percent boost, would only be disbursed to citizens who have been getting net monthly pay of over HRK 17,000 net. If the state added 27 percent also to the 1st pillar component of the combined pensions (1st and the 2nd pillars), the cost to the system would increase by HRK 40 billion by 2040. The choice for 97 percent of citizens with combined pension insurance is clear. Forgoing the 2nd pillar and opting just for the 1st, but with the 27-percent increase, will yield a notably better pension than sticking with both pillars in the combined insurance and forgoing the increase.

When the journalists asked about the sense of the continuing existence the 2nd pillar, except for those earning over 17,000 a month, the Ministry offered no explanation. Indeed, it insists that the intention is to strengthen the 2nd pillar. To that end, as of 2022, the mandatory contribution deducted from pay towards the 2nd pillar pension insurance will increase from 5 to 6 per cent. The current contribution brings HRK 1.2 billion per year into the system.

Investment in shares

The cumulative positive net effect on the state budget from all proposed elements of the pension reform in the 2019-2040 period will be HRK 61 billion if the contribution for the 2^nd pillar stays the same, and 105 billion if it grows to 6 percent. Given that the government would also take over the disbursement of pensions from the 2^nd pillar, the Ministry says the Croatian Pension Insurance Institute (HZMO) would set up a special pension insurance company for the purpose.

The cost of joining the scheme would apparently be under the 5 percent level charged by the only company currently about to offer such a scheme on the market (pending approval from the regulatory agency, HANFA) ‒ the Slovenian Triglav osiguranje. The proposed measures will also significantly reduce the management fees of mandatory pension fund management companies, but will also allow them to invest in company shares and business projects.

Furthermore, we have been told that the Ministry is considering a significant reduction of 2^nd pillar pensions for the policy holders who opt for the inheritance of their pension by the heirs.

Talks falling through

Among the most important proposed measures to be singled out is the provision to accelerate the equalization of age and other retirement conditions for women and men. It means that, as of 2031, the retirement age will be the same for men and women ‒ 67. Further discouragement of early retirement is also to be introduced. This is part of the reason trade union representatives left the Monday meeting at which the Ministry revealed the reform proposal to the unions and the HUP, the Croatian Employers' Association (which supports it).

"The meeting confirmed our expectations", said president of the Independent Croatian Trade Unions (NHS) Krešimir Sever. "The Government prepared everything and served us the fait accompli. To our explicit question today on whether there is room for negotiation over the extension of the retirement age, over penalization of early retirement and some other things, the Minister clearly said, 'no, there is no room'."