Investments of pension funds: challenges for the Regulation ...

Investments of pension funds: challenges for the Regulation and Supervision

- Lessons learned from the Italian experience -

Marco Mazzucchelli,

CEO Sanpaolo Wealth Management

Kiev - May 27th, 2004

2

AGENDA

1. OPENING REMARKS

2. ITALIAN PENSION SYSTEM REGULATORY FRAMEWORK AND KEY FINDINGS

3. CONCLUSIONS

ANNEX:

SANPAOLO WEALTH MANAGEMENT – HIGHLIGHTS

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1. OPENING REMARKS

A. The development of private pension systems (pillars II and III) in Eastern Europe could leverage on previous international experiences, mainly in terms of:

- regulatory framework results

- asset managers professional know-how

B. Regulators should enable domestic players to complement their competence/offering through:

The acquisition of products/capabilities managed by foreign specialized players, and/or

The outsourcing of specific asset classes delegated to international portfolio managers

C. The access to international markets/asset classes should be coupled with a solid system of checks and balances

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2. ITALIAN EXPERIENCE: SUMMARY

A. Pension system regulatory framework still based on pillar I and evolving over time towards:

- retirement age increase and reduction of replacement ratio

- increased allocations on pillar II and III to cover pension gap (1)

Effectiveness of supervision activities

B. Complementary pension system still small but growing

C. Pension funds adherents experienced good performance and stability despite major financial shocks, thanks to:

- Leverage of competence and know-how from one of the largest European asset management industry

- Wide range of investment products/markets available to portfolio managers in a well regulated environment

1) Calculated as the first pension payment vs. last salary received

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2. ITALIAN PENSION SYSTEM REGULATION

1) Calculated as the first pension payment vs. last salary received2) One off inflation linked retirement allowances Pension gap based on hypothesis of a 45 year old man, started working 25 years old, retires after 35 years of contributionsSource: CERP; Eurisko multifinanziaria; Bankit General report on economic trend in Italy

Pre-pension Reform (90s)

Post-pension Reform

(Amato+Dini)

Pension Gap

PENSIONS GAP

RE

PLA

CE

ME

NT

RA

TIO

(1)

0

20

40

60

80

10097,1 62,7

34,4

FOCUS ON

REDUCING

PUBLIC DEBT

ACTION TO

COVER

PENSION GAP

PILLAR I

PILLAR II AND III

Amato Reform ‘92:Increased retirement age and contribution period

Law ‘93First regulation of complementary pension schemes (pillar II)

Dini Reform ‘95In pillar I, introduction of defined

contribution system and gradual phase out from pay-as-you-go (PAYG) system

Prodi Reform ‘97PAYG phase out acceleration

Law ‘00Introduction of Private Pension schemes

(III pillar)

Maroni Law Proposal ‘04Enforcement of the complementary

pension system (Mandatory TFR(2) conversion to pension funds)

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2. REGULATORY ENVIRONMENT

Dedicated Supervision Authority Separate role for close-ended pension fund Sponsor and Portfolio Managers Custodian Bank with mandatory monitoring functions on Portfolio Manager activities Portfolio Managers can access diversified markets/products

Market /Products

   Pension FundSponsor

PortfolioManagers

Custodian Bank

Supervision Authority- COVIP

Adherents/ Members

Source: ABI, Covip website, Legislative Decree n.124/1993Source: ABI, Covip website, Legislative Decree n.124/1993

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2. PENSION FUND SYSTEM EVOLUTION (1)

0

500

1,000

1,500

2,000

2000 2003

OPEN-ENDEDPENSION FUNDS - AUM (MM Euro)

+215%

CLOSE-ENDEDPENSION FUNDS - AUM (MM Euro)

+315%

0

1,000

2,000

3,000

4,000

5,000

2000 2003

+282%

N.° membersN.° members 222.032 364.604

550

1.7314.543

1.190

877.523 1.042.381

Despite being a small part of the Italian retail financial assets (4%), the complementary pension fund market is experiencing a steady increase

(1) Funds established after 1993Note: Percentage calculated as total pension funds AUM on AUM net of duplications of Asset Management industrySource: Covip, Annual Report 2003

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Open-ended pension funds performance in 2003 5.7%

Close-ended pension funds performance in 2003 5%

Gross TFR Revaluation 3.2%

2. PERFORMANCE

TFR REVALUATION AND BACKTESTED

PENSION FUNDS PERFORMANCE

1) Net of all expenses and taxes2) Semi logarithmic scale; base 100 as May 31st, 1982Source: Covip, Annual Report 2003

1) Net of all expenses and taxes2) Semi logarithmic scale; base 100 as May 31st, 1982Source: Covip, Annual Report 2003

NOMINAL

PERFORMANCE (1)

INFLATION

ADJUSTED

PERFORMANCE (1) (2)

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

400

350

300

250

200

150

100

80

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2. A ROBUST SYSTEM

EXAMPLE: PARMALAT

95% of pension funds mandates have a minimum “BBB-” rating constraint on investments: Parmalat bonds were virtually absent

SYSTEM STABILITY AND RISK CONTROL

Complementary pension funds market were not affected by recent financial shocks, both domestic and international

REGULATORY GUIDELINES Risk diversification Attention to conflict of interests: strategic and tactical asset allocations managed by different

subjects (for close-ended funds) Dedicated Authority (Covip) to monitor pension fund investments

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2. THE ITALIAN ASSET MANAGEMENT MARKET (1)

Mutual Funds

Life insurance Technical reserves

Discretionary Portfolio Management

1.231

(1) Gross of duplicationSource: Eurisko – Prometeia – 2003 and Assogestioni

BN €

482

CAGR ’97 vs ‘03

+155%

+218%

+117%

+166%

Pension fund managers can leverage on know how developed in one of the largest European asset management industry

539

271

422

0

200

400

600

800

1.000

1.200

1.400

1997 2003

MUTUAL FUNDS MARKET

N.° Mutual Funds

N.° A.M. companies

626 1.012

53 55

203

85194

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2. ACCESS TO FOREIGN MARKETS AND INVESTMENT OPTIONS/LIMITS

ACCESS TO FOREINGN MARKETS

<50% of securities issued by OECD countries but not traded in regulated markets (1)

<5% of securities issued by non-OECD and traded in regulated markets

Securities issued by non-OECD countries not traded in regulated markets are forbidden

Individual issuer < 15% of pension fund assets

INVESTMENT LIMITS IN RELATED PARTIES

<20% of pension fund assets in a single related company Total allocation for related companies <30% of pension fund assets

OTHER QUANTITATIVE LIMITS

<20% of fund assets

<20% of fund assets <25% of investment fund value

CURRENCY MATCHING

The fund is obliged to invest minimum 1/3 of its assets in Euro

Liquidity

Shares of private equity and closed investment funds

Treasury Ministery, Decree November 21st, 1996, n.703 art. 4 and 51) Within such limits, the fund investments in equity cannot exceed 10% of the fund total assets and the total amount of debt and equity securities issued by non- OECD countries cannot exceed 20% of the fund total assets.

Treasury Ministery, Decree November 21st, 1996, n.703 art. 4 and 51) Within such limits, the fund investments in equity cannot exceed 10% of the fund total assets and the total amount of debt and equity securities issued by non- OECD countries cannot exceed 20% of the fund total assets.

CONCENTRATION LIMITS

<5% in any single unlisted company<10% in any single listed company

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2. EFFECTS OF PORTFOLIO LIBERALIZATION

PERFORMANCE: MSCI ITALY vs MSCI WORLD

40

60

80

100

120

140

160

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Liberalization of financial markets did not produce negative effects on domestic financial system

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3. CONCLUSIONS

- Open access to international

markets and multiple asset classes

Professional Asset

Managers key principles

Positive findings of Italian

regulatory system

- Portfolio diversification and

dedicated expertise

- Investments limits and sound

supervisory system

- Split of competencies and

responsibilities

- Rigorous investment process and

risk management approach

- Transparent and professional

code of conduct

Coherence between regulatory/supervisory system and professional asset

management principles has positive effects both for pension fund adherents

and domestic financial system

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ANNEX - SANPAOLO WEALTH MANAGEMENT- HIGHLIGHTS

Products/Services:

Institutional mandates

Strategic/tactical asset allocation advisory

Selection/monitoring of third-party institutional managers

Products/Services:

Umbrella fund (40 sub funds)

Management of third- party funds and dedicated SICAVs

Management of life insurance products

Advisory services on capital protection techniques

Full service provider

(1) JV 50% SPWM & 50% Santander Group(2) JV 50% SP Vita & 50% Reale Mutua

(1)

(2)

TOTAL AUM March ‘04:

131 BN €

The leading Italian Group in the Wealth Management industry (Asset Management and Insurance)

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CONTACTS

Filippo Reda +39 02 30347 2253E-mail [email protected]

Sanpaolo Wealth ManagementHead of Sales

Riccardo Pola +56 2 381 3434E-mail [email protected]

Sanpaolo IMIDeputy Manager - Chile