1 PENSION REFORM IN CROATIA:

2 PENSION REFORM BRIEF PAYGO PARAMETRIC REFORM IN 1998 FUNDED PILLARS LEGISLATED IN 1999 SUPERVISION AGENCY (HAGENA) AND CENTRAL REGISTRY OF AFFILIATES (REGOS) ESTABLISHED IN 1999 SECOND PILLAR LAUNCHED IN 2002 THIRD PILLAR STARTED IN 2002 COMPREHENSIVE REFORM OF CONTRIBUTION COLLECTION AND ADMINISTRATION FISCAL EXPANSION IN THE PAYGO PENSION PILLAR IN 2004

3 FIRST PILLAR REFORM ELEMENTS RAISING RETIREMENT AGE FROM 55/60(W/M) TO 60/65(W/M) IN 10 YEARS 2004: W=58; M=63 RAISING EARLY RETIREMENT AGE FROM 50/55(W/M) TO 55/60(W/M) IN 10 YEARS 2004: W=53; M=58

4 FIRST PILLAR REFORM ELEMENTS RAISING CALCULATION PERIOD FROM 10 BEST YEARS TO FULL CAREER IN 3-YEAR INCREMENTALS IN 10 YEARS 2004: 25 BEST YEARS RAISING DECREMENTAL RATIO TO 3.6% PER ONE YEAR OF EARLY RETIREMENT FROM 1,2% PER ONE YEAR

5 FIRST PILLAR REFORM ELEMENTS CHANGING INDEXATION SCHEME (50%W + 50%P BEFORE AND AFTER) 1991-X 1993: W BEFORE AND W AFTER X VII 1998: W BEFORE AND P AFTER VII 1998 – III 2004: W/P BEFORE AND AFTER III 2004 – TODAY: BACK TO W BEFORE AND W AFTER TIGHTENING DISABILITY ELIMINATING TEMPORARY DISABILITY STRENGTHENING DISABILITY ELIGIBILITY

6 PENSION SYSTEM FORECAST PRIOR TO 2004 LEGISLATION EXPANDING PAYGO SYSTEM

7 PENSION SYSTEM FORECAST AFTER 2004 LEGISLATION

8 TARGET REPLACEMENT RATES (BEFORE 2004 LEGISLATION)

9 BASIC FEATURES OF SECOND PILLAR ELIGIBILITY: WORKERS BELOW 40 YEARS OF AGE MANDATORY WORKERS BETWEEN 40 AND 50 OPTION WORKERS ABOVE 50 YEARS OF AGE: PAYGO CONTRIBUTION RATE TO INDIVIDUAL ACCOUNT: 5% OF GROSS WAGE (20% TOTAL CONTRIBUTION) SECOND PILLAR BENEFIT: ONLY PRICE-INDEXED LIFETIME ANNUITY

10 SECOND PILLAR CURRENT PERFORMANCE 4 PENSION FUNDS IN MARCH 2004 (DOWN FROM 7 IN 2003) 1,1 MILLION PARTICIPANTS (OUT OF 1,43 MILLION INSURED INDIVIDUALS) NET ASSETS IN MARCH 2004: 5,2 BIL KUNA (3% OF GDP) AVERAGE RATE OF RETURN (III III 2004) 2,76%; (IV III 2004) 7,47% PER ANNUM LOW SWITCHING FREQUENCY

11 2 ND PILLAR PORTFOLIO (MARCH 2004)

12 SECOND PILLAR FORECAST

13 THIRD PILLAR PERFORMANCE EMERGING INDUSTRY, 4 OPEN PENSION FUNDS IN MARCH 2004, UP FROM 1 IN EARLY 2003 TWO CLOSED FUNDS, FEW LICENSES PENDING 10,800 PARTICIPANTS IN OPEN FUNDS NET ASSETS IN MARCH 2004: 39 MIL KUNA ($6 MILLION)

14 3 RD PILLAR PORTFOLIO (MARCH 2004)

15 PENSION REFORM AND “MINI – FISCAL” REFORM UNIFICATION OF FLOWS OF DATA FOR SOCIAL CONTRIBUTION – REGOS ADMINISTERING THE SINGLE MONTHLY FORM WITH ALL INDIVIDUAL DATA ON CONTRIBUTIONS, PERSONAL TAX AND SURTAX, UNIFICATION OF FLOW OF FUNDS OF SOCIAL CONTRIBUTION – IN THE TREASURY, CENTRALIZED SECOND PILLAR COLLECTION AND ACCOUNT ADMINISTRATION AND PROVISION OF ALL SOCIAL-SECTOR RELATED INFORMATION (REGOS)

16 INDIVIDUAL ACCOUNTS IN THE SECOND PILLAR – SPECIAL FEATURES REGOS ADMINISTERS SYSTEM OF AFFILIATION, INITIAL AFFILIATION AND SWITCHING, FULL PRIVACY OF INDIVIDUAL CHOICE, EMPLOYER DOES NOT KNOW WHICH FUND THE EMPLOYEES ARE AFFILIATED TO, AGENTS CANNOT REGISTER AFFILIATES (NO EXAMPLES OF AGGRESSIVE DIRECT MARKETING OR DOUBLE REGISTRATION). 24h ACCESS TO INDIVIDUAL DATA

17 REGOS: COMPLIANCE RESULTS IN 2002 AND 2003 SECOND PILLAR FUNCTIONING: COLLECTION RATE 99% TRANSFER OF MONEY TO INDIVIDUAL ACCOUNTS WITHIN 24 HOURS FULL DATA DISCLOSURE TO INDIVIDUALS INTEGRATION OF CONTRIBUTIONS AND TAXES AND DATA FLOWS: DATA ON TAX AND CONTRIBUTION LIABILITY AVAILABLE IN 15 DAYS INSTEAD WITH 3+ MONTH LAG

18 REGOS: COMPLIANCE RESULTS IN 2002 AND 2003 IMPROVED COMPLIANCE ON ALL CONTRIBUTIONS: IN 2002 SOCIAL CONTRIBUTIONS GREW BY 11%, GROSS WAGES BY 6% AND EMPLOYMENT BY 2% - COMPLIANCE IMPROVED BY 2-3%; IN 2003 COMPLIANCE IMPROVED BY AS HIGH AS 4-5% CROATIAN EXPERIENCE: CONSOLIDATION OF DATA AND MONEY FLOWS SIGNIFICANTLY IMPROVES COLLECTION AND COMPLIANCE

19 PENSION REFORM IN CROATIA – SUCCESSES STABILIZATION OF PAYGO FINANCE BY 2004, EFFICIENT SECOND PILLAR COLLECTION AND ADMINISTRATION SYSTEM – HIGH CREDIBILITY (REGOS), EMPHASIS ON INDIVIDUAL CHOICE IN THE SECOND PILLAR (REGOS), SOUND START OF SECOND AND THIRD PILLAR FUNDS AND EFFECTIVE SUPERVISION SYSTEM (HAGENA), IMPROVED COLLECTION AND COMPLIANCE OF ALL PAYROLL TAXES, EFFICIENT PUBLIC CAMPAIGN,

20 PENSION REFORM IN CROATIA – PROBLEMS 2004 PENSION PACKAGE WITH STRONG FISCAL IMPLICATIONS, HIGH COSTS AND FEES IN THE 2ND PILLAR DESPITE CENTRALIZED ACCOUNT ADMINISTRATION FUNCTIONS, LOW CONTRIBUTION FOR THE 2ND PILLAR – 5% SHOULD BE INCREASED IN THE FUTURE, BUT 2004 PENSION PACKAGE MAKES IT LESS LIKELY, SMALL IMPACT ON DEVELOPMENT ON CAPITAL MARKET, SLOW DEVELOPMENT OF VOLUNTARY PENSION FUNDS.