The Impact of Minimum Return Guarantees on Management of Mandatory Pension Funds in Croatia

Mandatory pension funds in Croatia are defined contribution funds, meaning the investment risk is transferred to fund members. However, fund members are entitled to a guaranteed relative return: pension companies have to set aside a guarantee deposit that would be activated in case of underperformance. In this article, we quantify the risk of activation of the guarantee scheme and explore the impact of return guarantees on the way pension funds are managed. Findings suggest that the risk of activation of the guarantee scheme is quite low. We also find some evidence of herding among portfolio managers, as pension fund management companies could further reduce the risk of activation of the guarantee scheme by aligning their portfolios with competitors.