Instructions for Filling Out the Supervisory Report on Asset Liquidity and Liability Coverage of the Mandatory Pension Fund

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INSTRUCTIONS FOR FILLING OUT THE SUPERVISORY REPORT ON ASSET LIQUIDITY AND LIABILITY COVERAGE OF THE MANDATORY PENSION FUND

1. Introduction
   This document provides instructions for filling out the supervisory report titled "Report on Asset Liquidity and Liability Coverage of the Mandatory Pension Fund" (hereinafter: Report), whose submission obligation, deadlines, and method of submission were prescribed by the Croatian Financial Services Supervisory Agency (hereinafter: Hanfa) in Article 7 of the Regulation on Annual, Quarterly, and Other Reports of the Mandatory Pension Fund. The purpose of this report is to assess the liquidity of the assets of the mandatory pension fund in relation to its future liabilities.
2. Submitters of the Report
   The submitters of the Report are pension companies managing mandatory pension funds, and the report is submitted for each category of pension funds individually.
3. General Notes for Filling Out the Report
   When assessing market liquidity in future periods, a pension company may use its own estimates, which must be based on current market liquidity.
   Current market liquidity for transferable securities traded on a regulated market represents:

• for equity transferable securities: total trading volume on the regulated market in the previous twelve-month period,
• for debt transferable securities: total trading volume on the regulated market, including reported OTC transactions, in the previous twelve-month period. In addition to current market liquidity, when assessing the realizability of debt transferable securities with a maturity of less than three (3) years over a twelve-month period, the assumption of marketability due to their maturity may be additionally assessed and included in the liquidity ratio calculation.
  When assessing market liquidity in future periods, a pension company must assume that the entire amount of estimated future market liquidity for each individual transferable security is not fully available to the funds it manages. Therefore, the pension company must determine the share of estimated future liquidity for each individual transferable security that could be attributed to a single pension fund managed by that pension company, considering other market participants. On the requested reporting dates, a pension company does not show the total value of the portfolio (i.e., all asset classes listed in the Report), but only that portion which it estimates can be realized within a future period of one year (T=1Y) or three years (T=3Y). Estimates are based on the current portfolio allocation by asset classes, not on future hypothetical allocations, so that both the pension company and Hanfa can as early as possible identify potential issues the pension fund might face in covering its liabilities, given the current structure of the mandatory pension fund's portfolio. Estimates of future liabilities of the mandatory pension fund are made based on estimates of total accumulated liabilities from date T=0 to future reporting dates T=1Y and T=3Y, so that the Report covers more realistic liquidity needs in future periods. Future value estimates are derived from specific scenarios. One scenario, S=0, assumes normal market conditions without stress impacts. Other scenarios from S=1 to S=5 assume stressed scenarios that must be considered individually, and the impact of one scenario on another stressed scenario is not included. For example, when filling out values for a 2% interest rate increase, the simultaneous effect on stressed scenarios such as stock value decline or liquidity is not taken into account. One stressed scenario may affect the values of multiple rows (i.e., asset classes) as well as the liabilities of the pension fund. Values in the Report are presented in euros. The reporting date T=0 represents the last day of the half-year for which the Report is submitted. It is desirable that pension companies, when filling out the Report, use indirect exposure achieved through investments in UCITS funds and other publicly offered investment funds, as well as derivatives, in terms of the impact of specific stress events on the value of these asset classes.

4. Special Notes for Filling Out the Report by Asset Classes
   Row 1 – Contributions to the pension fund – The data refers to all contributions estimated to be received by the pension fund in the requested future period of one or three years. Contributions include paid contributions, payments based on transfers from other funds or categories, and payments based on the return of management fees in accordance with Article 63.a of the PPF Act (ZOMF). Given that, due to limitations under the PPF Act, contributions cannot be held for long periods on business accounts as cash on account or directed exclusively to deposits, and considering that contributions are directed into investments in specific assets which may be less liquid, all received contributions must be value-adjusted by 70% over a one-year period, or by 50% of the estimated amount of received contributions over a three-year period. Thus, in a one-year period, 30% of estimated received contributions can be recognized in Row 1, while in a three-year period, 50% of the total estimated received contributions is recognized. Rows 2-6 – Debt transferable securities – The value of debt transferable securities that can be realized without significant loss of value within a future period of one or three years, or which mature within those periods. A conservative estimation method must be followed by taking available current trading data, possibly adjusted by the pension company's estimate in accordance with point 3 of these instructions, appropriately reduced for purchases of pension funds managed by the company submitting the Report, as well as for transactions between pension funds managed by the company submitting the Report. Row 7 – Money market instruments – Only the maturity criterion of money market instruments is considered. Rows 8 and 9 - Equity transferable securities – The value of equity transferable securities that can be realized without significant loss of value within a future period of one or three years. A conservative estimation method must be followed by taking available current trading data, possibly adjusted by the pension company's estimate in accordance with point 3 of these instructions, appropriately reduced for purchases of pension funds managed by the company submitting the Report, as well as for transactions between pension funds managed by the company submitting the Report. Rows 10-12 – Shares in investment funds – The value of shares in investment funds that can be realized within the requested period of one or three years, without significant impact on the value of the investment fund's shares, and consequently on the value of the accounting unit of the mandatory pension fund. When estimating the value of UCITS funds, do not rely exclusively on legal provisions regarding redemption periods; instead, conservatively estimate the actual possibility of selling shares without significant impact on their value. When estimating the value of alternative investment funds, pay special attention to their rules, prospectuses, or other
   applicable acts. When estimating the value of funds traded on a regulated market, take into account all elements previously mentioned for equity transferable securities. Row 13 – Deposits and cash on account – Cash on account and deposits are considered liquid assets for maturities of one and three years. Row 14 – Investments in infrastructure projects – Consider the investment method and type of financial instrument, and accordingly take into account all elements applicable to debt and equity transferable securities previously mentioned in these instructions. Row 15 – Other financial instruments – This row refers to derivatives and other assets not included in the previous instructions, which in accordance with Article 125(1) point 13 of the PPF Act (ZOMF) represent permitted investments of the mandatory pension fund. Row 16 – Total liquid assets – Represents the sum of Rows 1 to 15. Row 17 – Payments from the fund – This row refers to the liabilities of the mandatory pension fund and includes all accumulated liabilities throughout the future period of one or three years. The T=1Y period includes all liabilities maturing within one year from date T, while the T=3Y period includes all liabilities maturing within three years from date T (including those maturing in the T=1Y period). Payments include all estimated payments from the mandatory pension fund for transfers to another fund category based on age conditions, payments due to membership termination upon retirement, payments due to the death of a fund member, and payments to the state budget. Row 18 – Other payments from the fund – Refers to all other payments from the mandatory pension fund that may arise for reasons not related to Row 17, i.e., based on transfers to other pension funds, regardless of whether they are managed by the same or a different pension company. Regarding maturity and estimation of such payments, the same rules as for Row 17 apply. Row 19 – Fund costs – This row lists the values of all costs that may burden the fund's assets in accordance with Article 87 of the PPF Act (ZOMF) and related regulations. Costs are listed as a cumulative amount throughout the requested period. Row 20 – Liabilities under repo and similar transactions (collateral given is illiquid) – This category includes all repo transactions and sale-and-repurchase transactions for which the company has pledged collateral that is not liquid and cannot be realized until the requested reporting date. Row 21 – Liabilities under derivatives – This row records negative market values of financial derivatives, which on date T=0 represent the future liability of the pension fund. The stated values are also subject to changes based on stress scenarios. Row 22 - Other costs and liabilities (e.g., regulatory changes, materialization of reputational risk, etc.) – This row includes all costs and liabilities related to extraordinary situations that may additionally burden the fund financially. Examples of such
   situations include regulatory changes causing the withdrawal of a portion of assets from mandatory pension funds, situations where reputational risk of the pension company and/or pension fund materializes, and any other unexpected circumstances that may cause significant outflows from the fund. Row 23 – Total liquidity needs – Represents the sum of Rows 17 to 22. Row 24 – Liquidity ratio – Represents the quotient of Rows 16 and 23.
5. Final Provisions
   These instructions enter into force upon adoption and will be published on Hanfa's website.
   Upon entry into force of these instructions, the Instructions for Filling Out the Supervisory Report on Asset Liquidity and Liability Coverage of the Mandatory Pension Fund dated 21 December 2022 (CLASS: 011-01/22-03/10, REG. NO.: 326-01-40-41-22-1) cease to apply.
   CLASS: 011-01/23-03/05
   REG. NO.: 326-01-40-41-23-1
   Zagreb, 3 May 2023.
   CHAIRMAN OF THE BOARD OF DIRECTORS dr. sc. Ante Žigman