The research conducted in the doctoral thesis aims to analyze the impact of mandatory pension insurance based on individual capitalized savings in Croatia on the sustainability of the pension system in the context of public finances, to show its effect on the adequacy of pensions of future retirees, to analyze the financial performance of pension funds in Croatia and assess overall economic effects of the introduction of mandatory pension insurance based on individual capitalized savings in Croatia. In addition, the aim of the paper is to explain and bring closer the functioning of the pension system and possible directions for its improvement to the general public. Compared to previous papers, the research in this paper collectively analyzes the previously mentioned impacts of pension funds in Croatia on the sustainability of the system and the adequacy of pensions, as well as its other social and economic aspects. The special feature of this paper is the search for strengthening and development of mandatory pension insurance based on individual capitalized savings in Croatia, which would lead to sustainability of the pension system and increase of the pensions adequacy in the long run, which is carried out using the scenario analysis methodology based on demographic projections and old-age pensions of insured persons of average characteristics. In this way, it was determined that the contribution rate to the second pillar of pension insurance has the greatest impact on sustainability and adequacy in the long run, followed by the length of service and the rate of return of pension funds. The performance of pension funds in Croatia, in addition to the traditional methodology for calculating risk-adjusted performance measures, was for the first time analyzed using the methodology of data envelopment analysis (DEA approach). It was found that mandatory pension funds of A and C categories exceed their reference values based on asset categories and associated market indices, while this is not the case with funds of B category. Finally, a new reference value was constructed for the protection of insured persons in mandatory pension funds in Croatia as the existing reference value is not an independent, external value but depends on the returns of pension funds. As the reference value (benchmark) is a key element of the guaranteed return used as a mechanism for protecting insured persons, which is currently not optimal, the new benchmark is based on positive foreign experiences respecting Croatian specifics and as such stands as a new instrument for economic policy makers and pension system regulator.