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

---

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

1. Introduction
   This document provides instructions for filling out the supervisory report titled Report on Asset Liquidity and Liability Coverage of Mandatory Pension Funds (hereinafter: Report), whose submission obligation, deadlines, and method of submission were stipulated by the Croatian Financial Services Supervisory Agency (hereinafter: Hanfa) under Article 7 of the Rules on Annual, Quarterly and Other Reports of Mandatory Pension Funds. The purpose of the aforementioned report is to assess the liquidity of the assets of a mandatory pension fund in relation to its future liabilities.

2. Entities Obligated to Submit
   The entities obligated to submit the Report are pension management companies that manage mandatory pension funds, and the report is submitted separately for each category of pension funds.

3. General Notes for Filling Out the Report
   Pension management companies may use their own estimates when assessing market liquidity in future periods, provided they are based on current market liquidity.
   Current market liquidity for transferable securities listed on a regulated market represents:
   − for transferable equity securities: total trading volume on the regulated market in the preceding one-year period, − for transferable debt securities: total trading volume on the regulated market, including reported OTC transactions, in the preceding one-year period. In addition to current market liquidity, when assessing the monetizability of transferable debt securities with a maturity of less than three (3) years over a one-year period, the assumption of marketability due to their maturity may be additionally estimated and included in the liquidity ratio calculation. When assessing market liquidity in future periods, a pension management company must assume that the entire amount of estimated future market liquidity for individual transferable securities is not fully available to the funds it manages. Therefore, the pension management company must determine the share of estimated future liquidity for an individual transferable security that could be allocated to a specific pension fund managed by that company, considering other market participants. On the requested reporting dates, a pension management company does not present the total value of the portfolio (i.e., all asset classes listed in the Report), but only that portion which it estimates can be monetized in a future period of one year (T=1Y) or three years (T=3Y). Estimates are made based on the current portfolio allocation by asset class, not on future assumed allocations, so that both the pension management company and Hanfa can as timely as possible identify potential issues the pension fund may face in covering its liabilities, given the current structure of the mandatory pension fund's portfolio. Estimates of future liabilities of a mandatory pension fund are made based on estimates of 2 total accumulated liabilities from day T=0 to future reporting dates T=1Y and T=3Y, so that the Report covers as realistic liquidity needs in future periods as possible. Future value estimates are derived based on specific scenarios. One scenario S=0 implies normal market conditions without stress impacts. The other scenarios from S=1 to S=5 imply stressed scenarios that must be viewed individually, and the impact of one scenario on another stressed scenario is not included. For example, when filling in values for a 2% interest rate increase, such market movement will not simultaneously be considered to have an impact on the stressed scenario of declining stock values, liquidity, etc. One stressed scenario may affect multiple rows (i.e., asset classes) as well as the liabilities of a pension fund. Values in the Report are presented in euros. The reporting day T=0 represents the last day of the half-year for which the Report is submitted. It is desirable that pension management 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 – Payments into the pension fund – The data refers to all payments estimated to be received by the pension fund in the future requested period of one or three years. Payments covered include paid contributions, payments based on transfers from other funds or categories, and payments based on the refund of management fees in accordance with Article 63.a of the Pension and Voluntary Pension Funds Act (ZOMF). Given that, due to restrictions under the ZOMF, payments cannot remain for extended periods on the pension fund's business accounts as cash on account or be directed exclusively to deposits, and considering that payments are directed into investments in certain assets which may also be less liquid, all received payments must be value-adjusted by 70% over a one-year period, or by 50% of the estimated amount of received payments over a three-year period. Thus, in a one-year period, 30% of the estimated received payments may be recognized in Row 1, while in a three-year period, 50% of the total estimated received payments is recognized. Rows 2-6 – Transferable debt securities – The value of transferable debt securities that can be monetized without significant loss of value over a future one- or three-year period, or that mature within the specified periods. A conservative estimation method must be followed by taking available current trading data, optionally adjusted by the pension management company's estimate in accordance with point 3 of these instructions, appropriately reduced for transactions purchasing pension funds managed by the company completing the Report, as well as for transactions between pension funds managed by the company completing the Report. Row 7 – Money market instruments – Only the maturity criterion of money market instruments is considered. Rows 8 and 9 - Transferable equity securities – The value of transferable equity securities that can be monetized without significant loss of value over a future one- or three-year period. A conservative estimation method must be followed by taking available current trading data, optionally adjusted by the pension management company's estimate in accordance with point 3 of these instructions, appropriately reduced for transactions purchasing pension funds managed by the company completing the Report, as well as for transactions between pension funds managed by the company completing the Report. Rows 10-12 – Shares in investment funds – The value of shares in investment funds that can be monetized in the requested one- or three-year period, without significant impact on the value of the investment fund's shares, and consequently on the value of the mandatory pension fund's accounting unit. When estimating the value of a UCITS fund, do not rely exclusively on statutory provisions regarding redemption periods; instead, use a conservative method to estimate the actual possibility of selling shares without significant impact on their value. When estimating the value of alternative
   investment funds, place special emphasis on their rules, prospectuses, or other acts where applicable. When estimating the value of funds traded on a regulated market, consider all elements already mentioned for transferable equity 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 consider all elements applicable to transferable debt and equity securities previously mentioned in these instructions. Row 15 – Other assets– The row refers to derivatives and other assets not included in the previous instructions, which in accordance with Article 125(1) items 5., 9., 19. and 20. of the ZOMF represent permitted investments of a mandatory pension fund. Row 16 – Total liquid assets – Represents the sum of rows 1 to 15. Row 17 – Payments from the fund – The specified row refers to the liabilities of a mandatory pension fund and includes all accumulated liabilities throughout the entire future period of one or three years. The T=1Y period includes all liabilities maturing within one year from day T, while the T=3Y period includes all liabilities maturing over a three-year period from day T, i.e., including those maturing in the T=1Y period. Payments include all estimated payments from a 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 pension fund member, and payments to the state budget. Row 18 – Other payments from the fund – Refers to all other payments from a 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 another pension management 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 ZOMF and related rules. Costs are listed in cumulative amount throughout the entire requested period. Row 20 – Liabilities under repo and similar transactions (given collateral 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 monetized until the requested reporting date. Row 21 – Liabilities under derivatives – This row records negative market values of financial derivatives, which on day T=0 represent the future liability of a 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 cost-wise. Examples of such situations include regulatory changes causing the withdrawal of a portion of assets from mandatory pension funds, 4 situations in which the reputational risk of a pension management company and/or pension fund is materialized, and any other unexpected circumstances that may cause significant outflows of funds from the pension 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. Special Notes for Filling Out the Report by Scenarios S=0 to S=5
   S0 = Normal market conditions – The specified scenario implies the absence of stress events in the market.
   S1 = Liquidity -15% – The specified scenario implies a 15% decline in the liquidity of all relevant asset classes. When calculating the value of assets marketable in T=1Y and T=3Y periods, a pension management company must only reduce future liquidity by the specified 15%, which should primarily reflect in the amount of available assets in the requested periods. The pension management company is not simultaneously required to prepare an estimate of the impact of declining liquidity on asset class values. S2 = IR + 2 p.b. (Interest Rate + 2 percentage points) – The specified scenario implies an increase in yields on all transferable debt securities in the fund's portfolio by 2 percentage points. S3 = Stock Value -10% – The specified scenario implies a 10% decline in the value of the equity portion of the portfolio. S4 = S1 and (Row 18 = 1% of NAV) – The specified scenario implies a combination of scenario S1 (15% liquidity decline) already described above, plus an additional stress event on the liability side, which implies members exiting for other reasons, excluding retirement and age-based transfers to another fund category. Fund payments in this scenario relate to a value of 1% of NAV (Net Asset Value). S5 = S1 and (Row 18 = 5% of NAV) – The specified scenario implies a combination of scenario S1 (15% liquidity decline) already described above, plus an additional stress event on the liability side, which implies members exiting for other reasons, excluding retirement and age-based transfers to another fund category. Fund payments in this scenario relate to a value of 5% of NAV.

6. 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 Mandatory Pension Funds dated May 3, 2023 (CLASS: 011-01/23-03/05, REG. NO.: 326-01-40-41-23-1) cease to apply.
   CLASS: 011-01/24-03/01
   REG. NO.: 326-01-40-41-24-18
   Zagreb, May 14, 2024.
   CHAIRMAN OF THE BOARD OF DIRECTORS dr. sc. Ante Žigman

---