Regulation on Permitted Investments and Additional Investment Restrictions of the Mandatory Pension Fund – Unofficial Consolidated Text (NN, No. 2/2020, 15/2020 and 24/2021)

PRAVILNIK
O DOZVOLJENIM ULAGANJIMA I DODATNIM OGRANIČENJIMA ULAGANJA OBVEZNOG MIROVINSKOG FONDA PRAVILNIK O DOZVOLJENIM ULAGANJIMA I DODATNIM OGRANIČENJIMA ULAGANJA OBVEZNOG MIROVINSKOG FONDA
Article 1.
This Regulation specifies in detail:

• additional conditions that pension fund assets must meet,
• conditions that the other contracting party in a pension fund transaction must satisfy,
• the method of investing in assets under Article 125(1)11 and Article 126(4) of the Law,
• the method of informing the public and HANFA regarding investments under Article 125(1)11 and Article 126(4) of the Law,
• additional investment restrictions, treatment of pension fund assets, and exposure calculation methods,
• the method for calculating return deviations under Article 125(6) of the Law,
• criteria for investing pension company funds in UCITS fund shares.

Article 2.
Pension funds are mandatory pension funds established by a pension company based on HANFA approval, managed by the pension company in its own name and for the joint account of fund members in accordance with the Law, which may be a pension fund of category A, B, or C.

REGULATED MARKETS
Article 3.
(1) A regulated market within the meaning of the Law is a market in the Republic of Croatia, another Member State, or a third country that is a member of the Organisation for Economic Co-operation and Development (hereinafter: OECD), which meets the conditions for a regulated market under the capital markets law of the Republic of Croatia and/or another Member State. (2) The official market and other segments of a regulated market within the meaning of the Law are markets in the Republic of Croatia, another Member State, or a third OECD country for which stricter listing and investor protection conditions have been prescribed by the capital markets law, relevant secondary legislation, and/or market operator rules compared to at least the minimum segment of a regulated market under paragraph 1 of this Article. (3) The pension company must establish effective internal procedures to verify whether markets in third OECD countries from paragraphs 1 and 2 of this Article meet the conditions to be considered regulated markets or official/other segments, as prescribed in paragraphs 1 and 2. (4) The pension company must document and retain each verification from paragraph 3 within the time limits prescribed by the Law and relevant secondary legislation.

PRAVILNIK
O DOZVOLJENIM ULAGANJIMA I DODATNIM OGRANIČENJIMA ULAGANJA OBVEZNOG MIROVINSKOG FONDA Transferable Securities
Article 4.
Transferable securities under Article 2(22) of the Law that a pension fund is permitted to invest in must meet the following criteria:

1. potential losses that a pension fund may incur relative to holding these instruments are limited to the amount paid for them,
2. adequate information is available in the form of regular, accurate, and complete security information,
3. they are freely transferable,
4. their acquisition aligns with the principles, strategy, and objectives of the pension fund’s investments,
5. risks of transferable securities are appropriately covered by the pension fund’s risk management system,
6. their liquidity does not impair the pension fund’s ability to meet its obligations, considering the cost limitation that ensures preservation of the pension fund's asset value.

Comparison of Returns on Investments in Transferable Equity Securities with Reference Value
Article 5. (NN 15/20)
(1) Before selecting an index to use as a reference value for return comparison, the pension company must collect key information related to that index, such as relevant index constituents (e.g., geographical or sectoral structure, or the top 20 constituents), conditions for a transferable security to become an index constituent, weights of individual constituents, the method of calculating index returns, and dates for revision and rebalancing. (2) The method of calculating returns achieved by investing pension fund assets in transferable equity securities under Article 125(1)5 of the Law, a group of such investments, or the entire investment, including indirect exposures through instruments under Article 125(1)6 and 9 of the Law, must be comparable to the method of calculating returns for the selected reference value. (3) For indirect exposures under paragraph 2 through instruments under Article 125(1)6 of the Law, equity funds are taken into account. (4) The selected comparison period under paragraph 2 must reflect the long-term nature of mandatory pension fund investments, and the pension company must conduct return comparisons for 5-, 10-, and 15-year periods. (5) Exceptionally under paragraph 4, if there is insufficient historical data for portfolio parts or the selected reference value to conduct comparisons across all three periods, the pension company must perform an assessment for the longest period with available historical data. The selected reference value must also have a comparable available time series of historical return data. (6) The pension company must prescribe the methodology for calculating returns under paragraph 2 and comparing them with the reference value in its internal acts, and must justify the selection and settings of such methodology to HANFA upon request.

PRAVILNIK
O DOZVOLJENIM ULAGANJIMA I DODATNIM OGRANIČENJIMA ULAGANJA OBVEZNOG MIROVINSKOG FONDA (7) The pension company must calculate for transferable equity securities under Article 125(1)5 of the Law, a group of such investments, or the entire investment, including indirect exposures through instruments under Article 125(1)6 and 9 of the Law:
a) average return for such groups or entire investment, calculated as the geometric mean of returns achieved over the 5-year period from paragraph 4, expressed annually; b) average return for such groups or entire investment, calculated as the geometric mean of returns achieved over the 10-year period from paragraph 4, expressed annually; c) average return for such groups or entire investment, calculated as the geometric mean of returns achieved over the 15-year period from paragraph 4, expressed annually; d) average return for such groups or entire investment, calculated as the geometric mean of returns achieved over the alternative reference period from paragraph 5, expressed annually; e) average return of the selected reference value for each period from a) to d), calculated as the geometric mean of returns achieved in each reference period, expressed annually. (8) If the pension company has selected different reference values for investment groups, average returns under paragraphs a) to d) are calculated separately for each group, including indirect exposures to that group through instruments under Article 125(1)6 and 9 of the Law, and compared with average returns of the selected reference value for the same period. (9) The pension company must include dividend distribution effects, as well as net trading profit or loss on such positions within the reference period, excluding related costs associated with acquiring and disposing of pension fund assets (e.g., fees paid to custodians or investment companies), in the return under paragraph 7. (10) The pension company must provide a tabular and graphical presentation of returns achieved by investing pension fund assets in transferable equity securities under Article 125(1)5 of the Law, a group of such investments, or the entire investment, including indirect exposures through instruments under Article 125(1)6 and 9 of the Law with reference value returns, for prescribed comparison periods in the pension fund’s informational prospectus.

Money Market Instruments
Article 6.
Money market instruments under Article 2(25) of the Law are financial instruments that meet the following conditions:

1. they have a maturity or remaining maturity of 397 days or less, or
2. they have a remaining maturity of less than two years, and their interest rate is variable and subject to regular return adjustment at least every 397 days depending on changes in market interest rates or indices.

PRAVILNIK
O DOZVOLJENIM ULAGANJIMA I DODATNIM OGRANIČENJIMA ULAGANJA OBVEZNOG MIROVINSKOG FONDA
Article 7.
Pension funds are permitted to invest in money market instruments under Article 125(1)1 to 4 of the Law, whose value can be precisely determined at all times or for which precise and reliable valuation systems and methodologies are available meeting the following criteria:

1. they enable calculation of the pension fund’s net asset value in accordance with the fair value at which a held money market instrument could be transacted under market conditions between informed and unrelated parties acting voluntarily,
2. they are based on market data or valuation models, including amortized cost methods.

Article 8. (NN 15/20)
(1) Money market instruments under Article 125(1)1 and 2 of the Law that are not listed on a regulated market are those money market instruments meeting the following criteria:

1. they meet the criteria in Articles 6 and 7 of this Regulation,
2. adequate information is available to appropriately assess the credit risk associated with investing in such instruments, considering paragraph 2 of this Article,
3. they are freely transferable.
   (2) For money market instruments under paragraph 1, the adequate information from point 2 must contain information on the issuance or issuance program and information on the legal and financial position of the issuer.

Liquidity Management
Article 9.
(1) When investing pension fund assets in transferable securities, money market instruments, and traded investment fund shares on regulated markets, the pension company must consider the liquidity of these financial instruments and their impact on the overall portfolio liquidity. (2) The pension company must continuously monitor portfolio liquidity by periodically assessing whether the portfolio holds sufficient liquid assets to meet liquidity requirements arising from membership termination at any time, as provided by Article 59(2) and Articles 94 to 96 or Articles 100 to 104 of the Law. (3) When assessing portfolio liquidity under paragraph 2, the pension company must simultaneously consider assets and liabilities to ensure asset liquidity aligns with fund liabilities regarding investment strategy implementation, member allocation to appropriate fund categories upon meeting remaining years until the reference date, membership termination requests, and transfers of members' funds to pension insurance companies. Simultaneously, the pension company must conduct stress tests to assess liquidity resilience to exceptional circumstances and other relevant risks affecting fund liquidity.

PRAVILNIK
O DOZVOLJENIM ULAGANJIMA I DODATNIM OGRANIČENJIMA ULAGANJA OBVEZNOG MIROVINSKOG FONDA (4) When assessing liquidity under paragraph 1 relative to the estimated quantity of individual transferable securities, money market instruments, and traded investment fund shares that could be sold within a reasonable time without significant asset value loss, the pension company must consider, where data availability permits, at least:

1. traded volume and trading value,
2. the proportion of issued transferable securities and money market instruments or net asset value of investment funds in the pension fund's net asset value,
3. the proportion of issued transferable securities or number of investment fund shares that the pension company intends to acquire for the pension fund or already holds in its assets,
4. market depth by considering bid-ask spreads, volumes, and bid values, particularly regarding the upper requirement for preserving pension fund asset value.
   (5) When assessing liquidity of individual transferable securities, money market instruments, and investment fund shares under paragraphs 1 and 4, the pension company must exclude bid data for pension funds it manages, as well as trading data between funds under the same company. (6) Based on elements in paragraphs 2, 3, and 4, the pension company must prescribe clear and precise criteria in its internal acts to determine available liquidity within reasonable timeframes, and must assess liquidity at least quarterly. (7) Transferable debt securities and money market instruments under Article 125(1)1 of the Law are presumed liquid, unless the pension company has information (e.g., market inactivity) indicating they may not be sold at limited cost within the appropriate timeframe to meet statutory liquidity requirements upon membership termination. (8) When information indicates that transferable securities and money market instruments are not liquid under paragraph 7, the pension company must perform a liquidity assessment considering all available elements from paragraph 4 and simultaneously accounting for fund liabilities as prescribed in paragraph 3. (9) Based on the assessment under paragraph 6 and considering future fund liabilities, the pension company must prescribe and revise at least quarterly the minimum proportion of liquid assets it must maintain in the portfolio. (10) The pension company must document and retain each assessment under this Article together with necessary supporting materials within time limits prescribed by the Law and relevant secondary legislation.

Article 10.
(1) The issue size of transferable securities and money market instruments under Article 126(1) and (2) of the Law is considered the size of each individual issue at the time of acquisition by the pension fund.
(2) A single issue of transferable debt securities and money market instruments under Article 126(1) and (2) of the Law is considered each individual tranche through which debt securities and money market instruments are issued.

PRAVILNIK
O DOZVOLJENIM ULAGANJIMA I DODATNIM OGRANIČENJIMA ULAGANJA OBVEZNOG MIROVINSKOG FONDA (3) The size of an alternative investment fund accepting multiple investor payments called by the alternative investment management company based on assumed payment obligations in accordance with fund rules is considered the sum of total paid capital and called payment obligations, determined on the start date of operations.

Financial Derivatives
Article 11. (NN 15/20)
(1) Financial derivatives under the Law are financial instruments meeting the following criteria:

1. the underlying asset of a financial derivative consists of at least one of the following, if it is an asset in which the pension fund may invest according to the Law and regulations:
   a) assets listed in Article 125(1)1 to 5 of the Law, including financial instruments with one or more characteristics of such assets, b) interest rates, c) exchange rates or currencies, d) financial indices.
2. OTC derivatives meeting condition 1 also satisfy Article 125(1)9 subpoints b) and c) of the Law.
   (2) Investments in financial derivatives are permitted exclusively for hedging pension fund assets or efficient management of assets and liabilities.
   (3) Speculative investments in financial derivatives are not permitted.
   (4) The pension company acting for the pension fund is not permitted to hold uncovered positions in financial derivatives. Short positions must be covered by pension fund assets fully corresponding to the derivative's underlying asset. Long positions must be fully covered by assets under Article 125(1)10 or money market instruments under Article 125(1)1 of the Law. (5) Exceptionally under paragraph 4, short positions in financial derivatives hedging risks related to transferable debt securities under Article 125(1)1 of the Law held in the portfolio, issued by the Republic of Croatia, need not be covered by pension fund assets fully corresponding to the underlying asset, provided the pension company has established and documented procedures, processes, and models demonstrating that fund assets represent a sufficiently good substitute for the underlying asset. The pension company must document and retain evidence of meeting these conditions within statutory time limits. (6) Exceptionally under paragraphs 4 and 5 regarding all other pension fund assets, short positions in financial derivatives need not be covered by fully corresponding assets if the pension company has established and documented procedures, processes, and models demonstrating that fund assets represent a nearly perfect substitute for the underlying asset. The pension company must document and retain evidence of meeting these conditions within statutory time limits. (7) When acting under paragraphs 5 and 6, the pension company must establish clear and documented strategies and objectives before implementation, approved by the management board based on a proposal from the advisory body responsible for investment strategy, with basic parameters known to the supervisory board. (8) When acting under paragraph 5, the pension company may use only financial derivatives where the maximum possible loss is predetermined and limited to the acquisition value of the derivative. (9) Within the strategy under paragraph 7, the pension company must determine and periodically revise (depending on market conditions) the proportion of assets whose value is being hedged. (10) When assessing whether specific pension fund assets represent a sufficiently good or nearly perfect substitute for the underlying asset, the pension company must consider at least the following cumulative factors:
3. how taking short positions in financial derivatives with sufficiently good/nearly perfect asset substitution fits the defined strategy and objectives, and how it contributes to preserving value or achieving returns;
4. whether cost-effective short positions can be taken with simultaneous full asset coverage;
5. whether taking short positions based on sufficiently good/nearly perfect substitution is significantly more cost-effective than full coverage, provided fund assets are not unjustifiably exposed to additional risks;
6. when acting under paragraph 5, whether a representative historical data sample exists to predict with significant certainty that the movement and characteristics of the sufficiently good substitute will match those of the substituted asset under given market conditions;
7. when acting under paragraph 6, whether a representative historical data sample covering a sufficiently long period including stressed market movements exists to predict with very high certainty that the movement and characteristics of the nearly perfect substitute will match those of the substituted asset;
8. how subjective decision-making is restricted or prevented within the model, ensuring criteria are applied to the greatest extent, and whether an appropriate process exists for deviations;
9. the maximum possible loss achievable during the planned strategy period, with very high reliability only when acting under paragraph 6;
10. the estimated achieved benefit, i.e., avoided losses, from using financial derivatives;
11. other relevant data and analyses significant for deciding on taking short positions based on sufficiently good/nearly perfect asset substitution.
    (11) The pension company