GUIDELINES

ON

REFERENCE VALUES USED BY PENSION FUNDS IN INVESTMENTS IN TRANSFERABLE SECURITIES

1. INTRODUCTION

Pursuant to Article 15, point 4 of the Act on the Croatian Financial Services Supervisory Agency ("Narodne novine" nos. 140/05 and 12/12), Article 125, paragraph 9, and Article 211.a of the Act on Mandatory Pension Funds ("Narodne novine" nos. 19/14, 93/15, 64/18 and 115/18), the Management Board, at its meeting held on 12 December 2019, adopts

GUIDELINES
ON
REFERENCE VALUES USED BY PENSION FUNDS IN INVESTMENTS IN TRANSFERABLE SECURITIES

1. INTRODUCTION

Pursuant to Article 125, paragraph 9 of the Act on Mandatory Pension Funds ("Narodne novine" nos. 19/14, 93/15, 64/18 and 115/18, hereinafter: ZOMF), Hanfa adopts guidelines for reference values that a pension fund may use when investing in transferable securities.

In accordance with Article 125, paragraph 5 of the ZOMF, when a pension fund invests the assets of a mandatory pension fund in transferable securities listed on a regulated market within the meaning of the provisions of the law governing capital markets, whose issuer is a joint-stock company with its registered office in the Republic of Croatia, another Member State, or an OECD Member State, for individual such investments, a group of investments, or total investments, including indirect exposures to transferable securities, through instruments under Article 125, paragraph 1, points 6 and 9 of the ZOMF (hereinafter collectively referred to as: the equity portion of the portfolio), it must use one or more reference values recognized by Hanfa.

Furthermore, in accordance with Article 211.a of the ZOMF, Hanfa is authorized to inform certain groups of supervised entities and other addressees through various types of publications (instructions, guidelines, etc.) regarding the explanation or method of application of certain regulations within its competence or related general legal acts.

Consequently, Hanfa adopts these Guidelines on reference values used by pension funds in investments in transferable securities (hereinafter: Guidelines) and informs pension funds of the reference values it recognizes.

2. GENERAL PROVISIONS

A reference value (English: benchmark) is a reference point against which investment performance is compared. A reference value is used for periodic comparison of investment strategy, in order to assess whether better or worse results have been achieved compared to the reference point. A reference value represents the value that would be achieved using a so-called passive investment strategy in a specific asset class, and allows for comparison with the investment performance of an individual fund in that asset class.

A pension fund, on behalf of a mandatory pension fund, uses an index or a combination of multiple indices to measure and compare the returns of the equity portion of the portfolio of a mandatory pension fund with the return of the selected index or combination of multiple indices.

The index or combination of multiple indices selected by a pension fund for individual investments in transferable securities, a group of such investments, or total investments, must be appropriate for that part of the portfolio of the mandatory pension fund.

A pension fund is obliged to document the reasons for which it selected a specific or specific reference values as appropriate for the equity portion of the portfolio. When selecting a reference value, if variants of indices that include dividend effects are available, as well as those that do not include such an effect, the pension fund is obliged to select the variant of the index that includes such an effect.

After a pension fund selects one or more reference values for individual investments, a group of investments, or total investments in transferable securities under Article 125, paragraph 1, point 5 of the ZOMF, it must use them consistently. However, with a significant change in investment strategy, the selected reference value should also change.

A pension fund should periodically review the selected reference value or selected reference values, at least once a year. When reviewing the investment strategy of the assets of a mandatory pension fund, the pension fund should also review the selected one or more reference values for the equity portion of the fund's portfolio.

If there are significant changes or the cessation of a certain reference value, the pension fund will immediately determine a new reference value that can replace the reference value that is no longer provided, stating the reasons why that reference value would be an appropriate replacement.

In this regard, taking into account that significant changes or the cessation of a certain reference value may occur, it is advisable for the pension fund to determine in advance one reserve reference value that can replace the reference value that is no longer provided, stating the reasons why that reference value would be an appropriate replacement.

3. INDICES RECOGNIZED BY HANFA

When selecting indices to recognize, one of the criteria Hanfa follows is the liquidity criterion. Namely, the basic components of the indices recognized by Hanfa must be sufficiently liquid, so that the returns of the equity portion of the portfolio of a mandatory pension fund can be compared with returns on liquid markets. Therefore, recognized equity indices should mainly consist of transferable securities for which it can reasonably be expected that their holder will be able to sell them when necessary.

The recognized reference values, i.e., indices that Hanfa recognizes under Article 125, paragraph 5 of the ZOMF, are those indices that meet one of the tests set out below:

1. Absolute test, which requires meeting the following requirements:
   a) at least 90% of the index components are in free float (English: free float), with a value of at least EUR 500,000,000, or, b) in the absence of information on free float, if they have a market capitalization of at least EUR 1,000,000,000;
2. Relative test, which requires meeting the following requirements:
   a) the equity index does not include more than half of the total number of issuers whose shares are traded on the market on which the index is based, b) the average daily turnover of each index component is at least EUR 100,000 and, if it also meets at least two of the following three criteria:
   * the total market capitalization of the index amounts to at least 40% of the market capitalization of all issuers whose shares are traded on that market,
   * the total turnover of trading in index components amounts to at least 40% of the total turnover of trading in transferable equity instruments on that market,
   * that index is used as the underlying asset for financial derivatives.

Indices that meet the aforementioned conditions, i.e., indices listed in the tables below, are always considered recognized indices within the meaning of Article 125, paragraph 5 of the ZOMF, and a pension fund may use them for the equity portion of the portfolio, provided that it documents and explains how the composition of that index reflects the composition of the equity portion of the fund's portfolio or the investment strategy that the pension fund wishes to achieve for that part of the portfolio of the mandatory pension fund.

A pension fund is allowed to use another index that does not meet the aforementioned quantitative criteria, if it can justify that another index achieves the same purpose. In that case, the pension fund is obliged to explain the reasons why that index is an appropriate measure, how much that index deviates from the aforementioned quantitative criteria, and the reasons why such deviation does not jeopardize the relevance of such an index.

Hanfa will supplement and update the quantitative criteria, as well as the list of recognized indices it recognizes, as needed, guided by, among other things, the criteria and list of main indices from Commission Implementing Regulation (EU) 2016/1646 of 13 September 2016 laying down regulatory technical standards with regard to main stock market indices and recognized stock exchanges in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms (OJ L 245/5, 14.9.2016). Hanfa will inform the public and pension funds via its website of any such changes.

Table 1. List of recognized indices for foreign markets¹

Recognized Reference Values	Country/Area
1. ASX100	Australia
2. ATX Prime	Austria
3. BEL20	Belgium
4. TSX60	Canada
5. CETOP20 Index	Central Europe
6. PX Prague	Czechia
7. OMX Copenhagen 20	Denmark
8. FTSE Europe Index	Europe
9. STOXX Europe 600	Europe
10. OMXH25	Finland
11. SBF120	France
12. S&P BMI France	France
13. HDAX	Germany
14. FTSE All World Index	Global
15. FTSE Large Cap	Greece
16. ISEQ 20	Ireland
17. FTSE MIB	Italy
18. Nikkei 300	Japan
19. TOPIX mid 400	Japan
20. Mexico Bolsa Index	Mexico
21. AEX	Netherlands
22. S&P NZX 15 Index	New Zealand
23. OBX	Norway
24. WIG20	Poland
25. PSI 20	Portugal
26. KOSPI 100	South Korea
27. IBEX35	Spain
28. OMXS60	Sweden
29. OMXSB	Sweden
30. SMI Expanded Index	Switzerland
31. FTSE 350	UK
32. NASDAQ100	USA
33. Russell 3000 Index	USA
34. S&P 500	USA

¹ Only foreign indices that, within the meaning of Article 125, paragraph 1, point 5 of the ZOMF, represent markets on which it is permitted to invest the assets of mandatory pension funds (EU Member States and OECD Member States) are taken into account.

Since mandatory pension funds invest in transferable securities issued by issuers with their registered office in the Republic of Croatia and the Republic of Slovenia, Hanfa also recognizes the following indices:

Table 2. List of recognized indices for the Croatian market

Recognized Reference Values for Issuers from Croatia	Country/Area
35. CROBEX	Croatia
36. CROBEX 10
37. CROBEXprime
38. CROBEXtr

Table 3. List of recognized indices for the Slovenian market

Recognized Reference Values for Issuers from Slovenia	Country/Area
39. SBI TOP	Slovenia

Table 4. List of MSCI Indices

Recognized MSCI Indices	Country/Area
40. MSCI World	Global

4. BASKETS OF INDICES

A pension fund may create a basket of reference values with which it will compare the return of the equity portion of the portfolio of a mandatory pension fund, if it considers that no single index represents an adequate measure for that class of assets of the pension fund. Such a basket of indices may consist of two or more indices listed in point 3 of these Guidelines, whereby the pension fund is obliged to ensure that the maximum weight of each index corresponds to the percentage of the portfolio invested in assets that that index best represents. A pension fund may assign a maximum weight between 0 and 100 to each index it includes in such an internally created index, and the sum of the maximum weights of all such indices must be 100%.

A pension fund is obliged to periodically review the basket of reference values, at least once a year. In this regard, with each significant change in the structure of the equity portion of the portfolio of a mandatory pension fund, the pension fund is obliged to review the maximum weight of individual indices in the basket of indices.

5. PUBLICATION OF DATA ON DEVIATIONS OF RETURNS FROM THE RETURN OF THE REFERENCE VALUE IN THE INFORMATIONAL PROSPECTUS

In accordance with Article 141, paragraph 1 of the ZOMF, a pension fund is obliged to issue an informational prospectus of the pension fund no later than 30 April of each calendar year, in which it provides a presentation of data up to 31 December of the previous year. In accordance with paragraph 2, point 12 of the same article, the informational prospectus must, among other things, contain data on the portfolio of the pension fund with a review of investment objectives and changes in the structure of the portfolio, as well as indications and explanations of deviations of investment returns from the selected reference value for the equity portion of the portfolio.

Consequently, the informational prospectuses of funds of categories A and B must, among other things, contain:

• data on the selected or selected reference values that the pension fund uses for individual investments, a group of investments, or total investments in transferable securities;
• a brief explanation of the reasons why the reference values were selected as appropriate;
• if the selected reference value does not meet the quantitative criteria listed in point 3 of these Guidelines, i.e., a reference value that is not listed in the tables in point 3 of these Guidelines, a brief explanation of the reasons why such a reference value is an appropriate measure;
• data on the period in which the return of the equity portion of the portfolio is compared with the return of the selected reference value, whereby the selected comparison period must reflect the long-term nature of investments of mandatory pension funds, in accordance with Article 4.a of the Rulebook on Permitted Investments and Additional Investment Restrictions of a Mandatory Pension Fund;
• data on the deviation of the return of the equity portion of the portfolio with the return of the selected reference value in the comparison period;
• an explanation of the deviation from the previous bullet point;
• a comparative tabular presentation of the returns of the equity portion of the portfolio with the return of the reference value, for the prescribed comparison periods;
• a graphical presentation of the comparative curve of the returns of the equity portion of the portfolio with the curve of the returns of the selected reference value;
• a brief explanation of the calculation of the return of the equity portion of the portfolio (which must include all components of the return, e.g., dividend payments, trading profits and losses, exchange rate differences, etc., as well as costs of hedging (English: hedge) of that part of the portfolio) and the return of the reference value, in accordance with Article 4.a of the Rulebook on Permitted Investments and Additional Investment Restrictions of a Mandatory Pension Fund;
• data on whether the pension fund changed the reference value or reference values in the year to which the informational prospectus relates, when and for what reasons.

6. TRANSITIONAL AND FINAL PROVISIONS

Pension funds are obliged to take all necessary activities to comply with these guidelines within 3 months from the date of their entry into force, and within 10 working days after the expiration of that period, submit a notification of compliance to Hanfa.

Hanfa will revise these Guidelines as needed.

These Guidelines are published on the Hanfa website and enter into force on the date of publication.

CLASS: 011-02/19-03/05
FILE NO.: 326-01-70-72-19-8
Zagreb, 12 December 2019.

CHAIRMAN OF THE MANAGEMENT BOARD dr. sc. Ante Žigman