Guidelines for Pension Funds and Pension Insurance Companies on Strengthening the Financial Literacy of Citizens of the Republic of Croatia

Croatian Financial Services Agency, 10000 Zagreb, Franje Račkoga 6, P.O. Box 164, Croatia

t: 01 6173 200, f: 01 4811 507, e: info@hanfa.hr, OIB (Tax ID): 49376181407, MB (Registration No.): 02016419, w: www.hanfa.hr

Pursuant to Article 15(4) of the Act on the Croatian Financial Services Agency (Official Gazette Nos. 140/05, 12/12), Articles 211.a of the Act on Mandatory Pension Funds (Official Gazette Nos. 19/14, 93/15, 64/18, 115/18, 58/20 and 156/23), 288.a of the Act on Voluntary Pension Funds (Official Gazette Nos. 19/14, 29/18, 115/18 and 156/23), and 150.a of the Act on Pension Insurance Companies (Official Gazette Nos. 22/14, 29/18, 115/18 and 156/23), as well as in connection with Article 59(22) of the Act on Mandatory Pension Funds, Article 68(1)(21) of the Act on Voluntary Pension Funds, and Article 49(4) of the Act on Pension Insurance Companies, at its Board meeting held on July 23, 2024, the Croatian Financial Services Agency hereby adopts

GUIDELINES for pension funds and pension insurance companies on strengthening the financial literacy of citizens of the Republic of Croatia

Purpose, Objective and Scope of the Guidelines With the intention of clarifying Article 59(22) of the Act on Mandatory Pension Funds (Official Gazette Nos. 19/14, 93/15, 64/18, 115/18, 58/20, 156/23), Article 68(1)(21) of the Act on Voluntary Pension Funds (Official Gazette Nos. 19/14, 29/18, 115/18, 156/23), and Article 49(4) of the Act on Pension Insurance Companies (Official Gazette Nos. 22/14, 29/18, 115/18 and 156/23), improving the operations of pension funds, enhancing information for members of pension funds, and improving the operations of pension insurance companies while enhancing information for potential and actual pension beneficiaries, the Croatian Financial Services Agency (hereinafter: Hanfa) issues the Guidelines for pension funds and pension insurance companies on strengthening the financial literacy of citizens of the Republic of Croatia (hereinafter: Guidelines). The objective of these Guidelines is to improve, develop, and harmonise existing procedures and business practices of pension funds and pension insurance companies regarding the information provision and financial education of current and future members of pension funds, as well as potential and actual pension beneficiaries, and the wider public, in relation to individual capitalised savings. Furthermore, the objective is to ensure greater public presence and recognisability of pension funds, pension insurance companies, and related terminology, which is essential for effectively strengthening financial literacy. Given that the wider public still largely perceives pension funds and pension insurance companies as insufficiently open institutions, and that terminology related to the pension system remains insufficiently known to the public, pension funds and pension insurance companies should strive through their activities for greater public recognisability, improved visibility, and clear, comprehensive communication of their activities, particularly those related to strengthening financial literacy. Therefore, these institutions should not view their financial literacy activities merely as fulfilling a legal formality, but rather as contributing to better visibility and recognition of their work, strengthening the confidence of insured persons and pension beneficiaries in the pension system, which ultimately contributes to its long-term sustainability. The Guidelines cover:

• separation of activities aimed at strengthening financial literacy from promotional activities
• strategy for implementing activities aimed at strengthening financial literacy
• substantive scope of activities aimed at strengthening financial literacy
• segmentation of activities aimed at strengthening financial literacy according to identified target groups
• externalisation of services for implementing activities aimed at strengthening financial literacy
• financing of activities aimed at strengthening financial literacy
• reporting on the implementation of activities aimed at strengthening financial literacy.

Content of the Guidelines
Article 59(22) of the Act on Mandatory Pension Funds and Article 68(1)(21) of the Act on Voluntary Pension Funds stipulate that pension funds are required to invest a portion of their annual income in strengthening the financial literacy of citizens of the Republic of Croatia regarding individual capitalised, or voluntary, pension savings.
Article 49(4) of the Act on Pension Insurance Companies stipulates that the management board of a pension insurance company is required to allocate a portion of its annual income to activities supporting the strengthening of financial literacy of citizens of the Republic of Croatia.
Hanfa neither suggests nor is authorised to create or approve the content of financial literacy strengthening procedures conducted by pension funds and pension insurance companies; however, these Guidelines indicate to such institutions possible standards, desirable practices, and principles that would be advisable to apply during the execution of this statutory duty, with a view to improving, developing, and harmonising existing procedures and business practices of pension funds and pension insurance companies regarding information provision and financial education.

1. Separation of Financial Literacy Strengthening Activities from Promotional and Informational Activities Laws regulating pension funds and pension insurance companies contain provisions on fund promotion, and thus pension funds and pension insurance companies are expected to separate their financial literacy strengthening activities from promotional activities, which implies separating these business activities both formally and procedurally within the organisations of these institutions. Strengthening financial literacy implies adhering to the principles of transparency, impartiality, comprehensiveness, and accuracy in information provision based on facts rather than specific value judgments and the presentation of preferences for certain services or service providers. Consequently, content containing marketing messages directed towards the use of a specific provider's services or favouring a particular financial service must not be used in the financial literacy strengthening process. In this regard, pension funds and pension insurance companies are also expected to consider their own promotional activities and the execution of certain statutory obligations (such as publishing statutes, information prospectuses or fund prospectuses, and sending notices to members regarding account balances or to pension beneficiaries concerning the calculation and/or changes in pension amounts) as not being activities within the financial literacy strengthening process. Furthermore, investments in developing and maintaining platforms that allow members access to individualised data on funds collected in their personal accounts, as well as forecasting expected pension amounts or providing calculators for informational pension calculations, and the provision of such data via the websites of pension funds and pension insurance companies, are not considered investments in strengthening financial literacy.

2. Strategy for Implementing Activities Aimed at Strengthening Financial Literacy It is advisable that pension funds and pension insurance companies, when planning financial literacy strengthening activities, consider that adequate financial education is not a one-off or short-term process. Therefore, it is advisable to develop their own financial literacy strategy and update it as necessary by taking relevant factors into account (which may include amendments to relevant regulations, various results of financial literacy surveys, etc.). The strategy should preferably:

• be adopted for a period of at least 3 years
• be approved at the management level of the pension fund or pension insurance company
• have a designated person by the management for its implementation
• be available to all employees of these institutions at all times.
  For successful strategy implementation, it is advisable that it contains at least:
• an analysis of the current situation
• strategy objectives divided into main and specific ones
• target groups
• activities with defined and measurable performance indicators
• a timeline for activities
• an activity communication plan
• resources required for strategy implementation (financial, expert, and others)
• evaluation.
  The evaluation of the strategy for implementing financial literacy strengthening activities should preferably be conducted annually (by March 1) for activities executed in the previous year, and based on the completed evaluation, the strategy implementation should be modified accordingly. The management boards of these institutions should approve the evaluation results and strategy modifications. Evaluation may contain, but is not limited to, the following:
  a) analysis of executed activities in relation to planned ones and explanations for deviations from the plan b) cost analysis for executed activities c) percentage of income spent on strengthening financial literacy in the previous calendar year relative to total revenues of the pension fund or pension insurance company earned in that year d) analysis of cooperation with other stakeholders (if applicable) e) analysis of public opinion and media publications f) correlation of executed activities with various indicators in a manner and scope applicable to the specific institution's operations (e.g., whether there is a link between executed activities and the number of persons independently choosing mandatory pension funds or changing fund subcategories, whether there is a link between executed activities and the choice of receiving pensions from both pension pillars, whether executed activities have influenced the number of inquiries or complaints from fund members managed by the institution or potential/actual pension beneficiaries, etc.).

3. Substantive Scope of Activities Aimed at Strengthening Financial Literacy Given that a portion of the responsibility for the efficiency and sustainability of the Republic of Croatia's pension system has been entrusted to pension funds and pension insurance companies, these institutions should view the financial literacy strengthening process for the wider public in the context of fulfilling their socially beneficial role. When planning educational activities for financial literacy purposes, it is useful to pay attention to the importance of maintaining and enhancing wider public confidence in Croatia's pension and financial systems, and that pension funds and pension insurance companies must act in the best interests of the members of the pension funds they manage or pension beneficiaries. Since statutory provisions explicitly state that strengthening refers to individual capitalised, or voluntary, pension savings, and since the interests of fund members as well as potential and actual pension beneficiaries include being adequately, accurately, and impartially informed, the financial literacy strengthening procedures conducted by these institutions should primarily focus on general information about the characteristics of these financial services, without differentiating in any way between services provided by individual pension funds or pension insurance companies. Consequently, some general topics related to the pension system that can be clarified through educational activities conducted by these institutions during financial literacy campaigns include, but should not be limited to:

• clarification of the concept of a pension fund as a central place for collecting funds from multiple sources
• clarification of the concept of a pension insurance company as an institution authorised to pay pensions within mandatory and voluntary pension insurance, in accordance with the activities prescribed by law governing their operations
• clarification of categories of mandatory pension funds and their differences regarding investment principles and membership
• clarification of different types and forms of pension payouts or pension programmes within mandatory and voluntary pension insurance
• the right to choose a mandatory pension fund when establishing mandatory pension insurance, and the right to change pension funds
• the right to choose a pension insurance company in relation to pension payouts
• clarification that total capitalised funds on a member's personal account are the member's personal property intended for retirement and constitute their ownership
• rights of fund members or potential pension beneficiaries when exercising their right to a pension
• diversification of investments in assets of pension funds and pension insurance companies, and associated risk dispersion
• detailed description of obligations of pension insurance companies towards pension beneficiaries, including a description of included guarantees
• separation of the asset accumulation phase in pension funds and the pension payout phase by pension insurance companies
• importance of observing fund and company operations and returns over a longer period, taking economic cycles into account
• impact of capital market dynamics on investments by pension funds and pension insurance companies
• objectives pursued by pension funds (considering the role of pension funds in the entire pension system, and in the Croatian economy as a whole through clarification of fund investment concepts, the role of pension funds as institutional investors in capital markets, and institutions with social functions that should not be viewed solely as financial institutions)
• objectives pursued by pension insurance companies (considering their role in the entire pension system, and in the Croatian economy as a whole through clarification of investment concepts, their role as institutional investors in capital markets, and institutions with social functions and systemic significance related to pension payouts within mandatory insurance based on individual capitalised savings, which should not be viewed solely as financial institutions)
• operations of pension funds in the interest of members
• operations of pension insurance companies in the interest of pension beneficiaries
• opportunities and rights of pension fund members, and restrictions when using accumulated funds
• opportunities and rights of potential and actual pension beneficiaries, and restrictions regarding the choice of pension programmes.
  Considering the specific characteristics of financial services provided by pension funds and pension insurance companies (particularly the aspect of mandatory membership in the second pillar of pension insurance, and pension payouts) and their connection with other segments of the financial market (particularly capital markets), other related topics may be addressed in an appropriate volume during strengthening activities, including:
• importance of prudent handling of assets/m