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Pension insurance in the Republic of Croatia

Pension insurance in the Republic of Croatia

In the Republic of Croatia, pension insurance is one of the branches of social insurance and an integral part of the social security system whose main objective is to overcome social risks, achieve social justice and social solidarity for the purpose of maintaining and developing a well-functioning society. Social security in society depends on the state of the economy. However, it is hard to develop an economy without the necessary level of citizens’ social security. In order to achieve a long-term viable pension system which will ensure social security in the event of ageing population, disability and death risks, through which greater individual responsibility for old-age income will be achieved, the Croatian pension system was as of 1 January 1999 reformed by introducing a mixed public-private pension system consisting of three pillars of pension insurance:

 I pillar – compulsory pension insurance based on generational solidarity

II pillar – compulsory pension insurance based on individual capitalized savings

III pillar – voluntary pension insurance based on individual capitalized savings

 

I pillar – compulsory pension insurance based on generational solidarity

(introduced on 1 January 1999)

The first pillar of pension insurance is called a pillar of generational solidarity, as persons who work pay contributions for pension insurance, whereas such contributions serve for giving pensions to current pension beneficiaries. In addition to contributions collected from insured persons, the first pillar is also funded from the state budget.

The basic principles of compulsory pension insurance based on intergenerational solidarity (I pillar) include reciprocity – dependence of the amount of pension and the length of qualifying period, as well as the amount of salary; and solidarity – social redistribution in favor of certain groups. According to the Pension Insurance Act, insured persons are compulsorily insured in accordance with principles of reciprocity and solidarity for the event of ageing, reduction of working capacity with remaining working capacity and partial or total loss of working capacity, and the members of their families in the event of insured person’s or pension beneficiary’s death (right to an old-age pension, early retirement pension, disability pension, temporary disability pension, survivors’ pension, minimum pension, basic pension). Professional rehabilitation, physical impairment benefit and travel expenses related to the exercise of insured rights are also ensured.

Persons compulsorily insured in I pillar are:

  • Workers, clerks and employees and persons equalized to them by virtue of special regulations, employed in the state territory of the Republic of Croatia,
  • Persons elected or appointed to permanent offices in certain state government bodies, units of local government and self-government, provided they receive salaries for their work,
  • Persons who are trained to work under special regulations,
  • Persons employed by foreign organizations with seat in the Republic of Croatia who do not enjoy diplomatic immunity (foreign representatives, international organizations and institutions), foreign natural persons with residence or seat in the Republic of Croatia, or with foreign diplomatic missions or consular posts or other international agencies or representatives with seat in the Republic of Croatia who enjoy diplomatic immunity, or who are in personal service of foreign citizens, unless otherwise provided by European Union regulations on coordination of social security systems or international agreement on social security,
  • Foreign citizens and stateless persons who are employed in the territory of the Republic of Croatia, unless otherwise provided by European Union regulations on coordination of social security systems or international agreement on social security,
  • Workers posted abroad who perform jobs in another country for an employer based in the Republic of Croatia and persons who work in diplomatic missions or consular offices of the Republic of Croatia abroad,
  • Seasonal workers in agriculture, according to the Act on Promotion of Employment,
  • Unemployed persons who are compulsorily insured under conditions and during the time period as specified by employment regulations,
  • Persons providing assistance and care for Croatian disabled Homeland War veterans who are receiving compensation for such work under special regulations,
  • Persons who are employed by an employer who is established in a Member State where the EU regulations on the coordination of the social security system are applied and has no registered company or subsidiary in the Republic of Croatia to which, in accordance with the EU legislation on coordination of the social system security, legislation of the Republic of Croatia is applied,
  • Craftsmen who are properly registered,
  • Self-employed persons who, in accordance with special regulations, follow their professional activity, such as attorneys, physicians, artists, journalists, educators, language editors, translators and interpreters, family home representatives, natural persons who independently carry out counselling and assistance and home care services as professional activity,
  • Top sportsmen, unless they are compulsorily insured on another basis,
  • Persons who are based on self-employment in agriculture and forestry considered taxpayers of income or profit tax
  • Persons performing an activity whose performance does not require the issuance of approval or registration, but which is characterized by independence, permanence and intention to generate income or profit, making such persons based on such activity taxpayers of income or profit tax, unless they are compulsorily insured on another basis,
  • Persons performing crafts activity or having secondary employment as defined by the Crafts Act, unless they are compulsorily insured on another basis or are not pension beneficiaries other than beneficiaries of disability pension due to partial loss of working capacity
  • Persons who perform agricultural and forestry activity as their sole or main occupation and are entered in the register of agricultural family farms or the register of forest owners as holders and members of agricultural family farms or forest owners and members of their household,
  • Members of management boards and executive directors of trading companies, liquidators and managers of cooperatives, if they are not compulsory insured on a different basis and unless otherwise provided by a special regulation,
  • Priests and other clerical officers of religious communities entered in register of religious communities kept by the ministry responsible for their administration, unless they are compulsorily insured on another basis,
  • Parent who performs parental duties during the child’s first year, provided he is not compulsorily insured on another basis and that the child is a Croatian citizen and that parents and the child both have their place of residence in the Republic of Croatia,
  • Parent caregiver, caregiver of a child with developmental difficulties or a caregiver of a disabled person according to welfare regulations during the term of this status,
  • A foster parent who performs standard foster care and a foster parent who is a specialized foster care provider,
  • Persons employed abroad by international organizations and foreign employers, who are not compulsorily insured according to foreign regulations to which international agreements on social security apply, or who are not compulsorily insured according to European Union regulations on coordination of social security systems,
  • Persons employed in EU institutions, who are not compulsorily insured according to EU regulations,
  • Persons employed in the state territory of the Republic of Croatia with employers based abroad without a registered subsidiary in the Republic of Croatia,
  • Members of ship crew in international waters whose employer, shipowner or company is a national or foreign legal person, unless otherwise provided by European Union regulations on coordination of social security systems or international agreement on social security,
  • Persons who generate other income according to regulations on income tax, for which contributions for pension insurance are collected under regulations on compulsory insurance contributions (other income).

Funding: the system of generational solidarity is a defined benefits system. The Contribution Act prescribes the obligation to pay contributions for funding of compulsory insurance, including contributions for pension insurance. Contributions are collected by the Tax Administration and the contribution rate for insured persons who are insured only in the I pillar amounts to 20 %, while the contribution rate for I pillar for insured persons who are insured in both compulsory pillars (I and II pillar) amounts to 15 %.

The implementation of pension insurance based on generational solidarity falls within the competence of the Croatian Pension Insurance Institute

 

II pillar – compulsory pension insurance based on individual capitalized savings

(introduced on 01 January 2002)

 

The second pillar represents individual capitalized savings. Individual savings refer to personal assets of insured persons and the fact that paid funds are recorded in personal accounts, while capitalized savings refer to return on investment achieved upon payment to the selected compulsory pension fund. This form of pension insurance was introduced in order to expand the source of funding in relation to compulsory pension insurance based on generational solidarity, which sought to achieve greater individual responsibility for the safety of the elderly.

 

II pillar includes compulsory insured persons of up to 40 years of age. The rate of contributions for persons insured in II pillar amounts to 5 % of the gross salary, whereby insured persons may themselves choose a compulsory pension fund and compulsory pension fund category to which they will contribute the said amount.

As of 01 January 2019, all insured persons with the compulsory insurance in the I and II pillar are able to choose their pension system, i.e. which pension they prefer when exercising the right to the old-age pension or early old-age pension. The insured persons can opt for the following:

  • Getting the pension exclusively from I pillar
  • Getting the pension from Pillar I and Pillar II (in that case, the pension from Pillar I is determined with a supplement of 27%, regardless of when the pensionable years of service were completed (before or after the introduction of Pillar II)).

Within the II pillar, the phase related to collection of funds is implemented through the mandatory pension funds, and the phase related to payment of pensions is implemented only through the pension insurance companies. The pension system is based on the capitalised savings and regulated by two legal acts. The Act on Mandatory Pension Funds applies to the phase of accumulation and capitalisation of contributions and The Act on Pension Insurance Companies applies to the phase of the pension payment.

The amount of pension depends on the amount of capitalized contributions paid by the pension fund member and the duration of pension payouts. It is determined based on the principle of reciprocity and the principle of certain contributions subject to actuarial calculation, namely the contract on pension concluded between a member of the fund and the pension insurance company.

The Central Register of Insured Persons – REGOS is the competent institution for insurance based on individual capitaliZed savings.

The Croatian Financial Services Supervisory Agency – HANFA monitors whether pension companies and funds comply with prescribed laws, whether they invest according to the required structure and comply with the rules of ethic business conduct and marketing of funds and companies.

 

III pillar – voluntary pension insurance based on individual capitaliZed savings

(introduced on 01 January 2002)

 

III pillar is based on voluntarity and as such represents a matter of personal choice. Just as II pillar, it represents individual capitalized savings and offers the opportunity to assume responsibility for one’s own retirement benefits and ensure a better standard of living at an older age. III pillar is an upgrade of retirement benefits based on the two compulsory pillars of pension insurance and, besides being voluntary, carries a higher level of flexibility than the first two pillars, most evident in the fact that one may himself choose the frequency as well as the amount of payments into the fund.

The collection of funds within the framework of III pillar of pension insurance is carried out through voluntary pension funds, while payouts of pensions are made by pension insurance companies, and, exceptionally, pension companies, that may carry out temporary pension payouts from voluntary pension funds. Pension reform, which entered into force on January 1, 2019, has also introduced the possibility of pension payments by the life insurance companies.

Voluntary pension savings are the only form of saving which includes two types of state incentives: state incentive funds and tax incentives for employers. The Republic of Croatia encourages pension savings, that is, voluntary pension savings, and approves the incentive to all members of III pillar in the amount of 15 % of the annual payment, up to a maximum of HRK 5,000.00, that is, the highest state incentive can amount to HRK 750.00. Every resident and national of the Republic of Croatia has the right to receive such incentive. Such right can also be realized by members who are not nationals of the Republic of Croatia provided that they are residents of one of the EU or EEA Member States. However, they can exercise such right only during the period that they pay compulsory pension insurance – II pillar in the Republic of Croatia. The supervision of legitimate identification and use of incentives is performed by the Ministry of Finance. The membership in a voluntary pension fund offers its member the option of voluntary pension savings being paid by his employer. All payments made by the employer in III pillar of pension insurance up to the monthly amount of 66,37 EURO, that is, up to 796,44 EURO a year, are not considered a salary. That amount is considered a tax-recognized expense or employer’s expense.

The yield of a voluntary pension fund, that is, the income earned by the pension company by managing the funds of the fund, increases the value of assets of fund members. With regard to the purpose of savings, the investment of pension fund assets is characterized by their long-term nature. The yield of a fund should, therefore, be observed over a longer period (for example, the average duration of savings in the fund is estimated to be 15 years).

There are no limitations on membership, neither health nor age represent a restriction. A member can, therefore, become whoever wishes to do so. Also, there are no time restrictions on the duration of membership. A member may choose the amount, duration, and dynamics of payments to the fund. Payments are not compulsory and depend solely on payer’s current capabilities. The membership in the fund is not terminated by termination of payments or irregular payments. Instead, the existing funds in the account continue to generate yields. All accumulated funds belong to the member, regardless of who the payer was. They can be inherited in full, and for the members who signed the membership agreement by 31 December 2018 at the latest, the only prerequisite for their utilisation that the beneficiary is 50 years of age, and for the members who signed the membership agreement after 01 January 2019, the prerequisite is that the beneficiary is 55 years of age.

 

The Act on Voluntary Pension Funds regulates the establishment and operation of voluntary pension funds, while the Act on Pension Insurance Companies regulates the establishment and operation of pension insurance companies, pension schemes and pensions and their distribution. HANFA provides supervision over the business of pension insurance companies.

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