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

Author

Listed:
  • Petar Pierre Matek

    (Croatian Financial Services Supervisory Agency, Zagreb, Croatia
    College for Finance and Law, University College EFFECTUS)

  • Masa Galic

    (Croatian Financial Services Supervisory Agency, Zagreb, Croatia)

Abstract

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.

Suggested Citation

  • Petar Pierre Matek & Masa Galic, 2017. "The Impact of Minimum Return Guarantees on Management of Mandatory Pension Funds in Croatia," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 67(4), pages 342-369, August.
    • Handle: RePEc:fau:fauart:v:67:y:2017:i:4:p:342-369
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    File URL: http://journal.fsv.cuni.cz/storage/1391_342-369_galic_ex-radakovic_final_issue_04_2017.pdf
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    References listed on IDEAS

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    1. Giuseppe Grande & Ignazio Visco, 2010. "A public guarantee of a minimum return to defined contribution pension scheme members," Temi di discussione (Economic working papers) 762, Bank of Italy, Economic Research and International Relations Area.
    2. Mitchell, Olivia S. & Smetters, Kent (ed.), 2003. "The Pension Challenge: Risk Transfers and Retirement Income Security," OUP Catalogue, Oxford University Press, number 9780199266913.
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    4. World Bank, 2005. "Guarantees - Counting the Cost of Guaranteeing Defined Contribution Pensions," World Bank Publications - Reports 11239, The World Bank Group.
    5. Deelstra, Griselda & Grasselli, Martino & Koehl, Pierre-Francois, 2004. "Optimal design of the guarantee for defined contribution funds," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2239-2260, October.
    6. Petar-Pierre Matek & Masa Radakovic, 2015. "Is active management of mandatory pension funds in Croatia creating value for second pillar fund members?," Financial Theory and Practice, Institute of Public Finance, vol. 39(3), pages 245-278.
    7. Griselda Deelstra & Martino Grasselli & Pierre-François Koehl, 2004. "Optimal design of the guarantee for defined contribution funds," ULB Institutional Repository 2013/7602, ULB -- Universite Libre de Bruxelles.
    8. Mahayni, Antje & Schlögl, Erik, 2003. "The Risk Management of Minimum Return Guarantees," Bonn Econ Discussion Papers 18/2003, University of Bonn, Bonn Graduate School of Economics (BGSE).
    9. Gary Burtless, 2007. "International Investment for Retirement Savers: Historical Evidence on Risk and Returns," Working Papers, Center for Retirement Research at Boston College wp2007-05, Center for Retirement Research, revised Feb 2007.
    10. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-748, September.
    11. Marie‐Eve Lachance & Olivia S. Mitchell & Kent Smetters, 2003. "Guaranteeing Defined Contribution Pensions: The Option to Buy Back a Defined Benefit Promise," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 1-16, March.
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    Cited by:

    1. Draženović Bojana Olgić & Hodžić Sabina & Maradin Dario, 2019. "The Efficiency of Mandatory Pension Funds: Case of Croatia," South East European Journal of Economics and Business, Sciendo, vol. 14(2), pages 82-94, December.

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    More about this item

    Keywords

    defined contribution pension funds; guaranteed returns; herding effect;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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