Pension funds in Italy: issues and perspectives General Assembly of AEIP Rome, June 5, 2015 Mauro Marè Tuscia University and Mefop.

Pension funds in Italy: issues and perspectives

General Assembly of AEIPRome, June 5, 2015

Mauro MarèTuscia University and Mefop

1 Outline

a. Demography, aging and labor market: economics of pensions

b. Economic reasons for two pillars, mixed pension systems: PAYGO + funding

c. Pension funds in Italy: a snapshot

d. Issues and perspectives

2 Demography and population

• Need to start from demography: we experience some dramatic changes…

• Importance of demography for any pension system!! Both PAYGO and funded…

• The first source of economic growth is the population growth…

• Population will dramatically decline in the next future in EU countries; (economic potential for growth)

• the only way to stabilize the number is migration; but this involves huge problems….(cohabitation, melting pot?, underground economy, etc.)

3 Aging

• Europe, in particular, Italy, Germany, Poland but also other OECD countries will experience a dramatic aging process (see tables)

• Population aging raises a key challenge for pension systems, (funded and PAYGO), the issue is more evident for PAYGO

• Number of active people will dramatically decrease, while the number of people aged > 65 will intensely increase

• people who pays for retired will decrease; people aged > 65 will live much longer: who pays for it?

Fertility of baby boom generation

Source: European Commission (2012)

From 4 active/1 retired to less 2 active/1 retired

Public spending for pensions as % of Gdp, EU 27 and Norway (2010)

9

10

Public spending for pensions as % of Gdp, EU 27 and Norway (2060)

4 Economic reasons for two pillars• Economic theory and empirical evidence show that two (or more) pillars are

better than one…!!

• reasons: efficiency, financial diversification, asset decorrelation, political risk reduction, etc.

• Main point: funded systems reduce the political economy game that takes place among generations and allows the transfers of pensions burden on future generations…

• With PFs we have real accumulation… not notional claims (paper-written) on future generations

• equity among generations is not credible, neither enforceable…governments try to get an agreement but…. one side (new born or young cohorts) of the contract is not at table..

• Generations are egoistic: younger workers may not be willing to pay for parents/older generation

5 Pension funds in Italy

• Number of participants/members

• Breakdown for industrial sector (private, public, independent) and type of pension funds (closed, open, individual plans, etc.)

• Total assets managed

6 Italian second pillar: the number of participants (memberships)

December 2014 December 2013%

Occupational PFs

Closed PFs 1,944,304 1,950,552 -0.3%

Pre-existing PFs 654,000 654,627 -0.1%

Personal PFs

Open PFs 1,053,139 984,584 7.0%

Insurance contracts 2,958,938 2,639,148

12.1%

Total 6,584,983 6,203,763

6.1%

7 Financial Assets managed by Pension Funds (billions of euro)

December 2014 December 2013 %

Occupational PFs

Closed PF 39,645 34,504 14.9%

Pre-existing PF 50,380 50,376 -

Personal PF Open PF 13,960 11,990 16.4%

Insurance contracts 22,273 19,513 14.1%

Total 126,323 116,443 8.5%

8 Membership rate (gross and net)

Source: Covip (2014)

Membership rate

Type of workers

Enrolled Paying enrolled Employed Gross Net

Dependents private sector 4,160,898 3,488,479 13,826,000 30.1% 25.2%

Dependents public sector 154,766 152,486 3,389,000 4.6% 4.5%

Independent workers (autonomi) 1,513,010 995,603 5,684,000 26.6% 17.5%

Total 5,828,674 4,636,568 22,899,000 25.5% 20.2%

Total Workforce 25,642,000

Membership rate in % workforce 22.7% 18.1

9 The Asset Allocation of Italian PFs (end 2013)

CFP OFP PPF Insurance contracts Total

Deposits 3.4 5.6 5.9 6.6 5.0

Government Bonds 59.6 43.0 39.2 54.4 50.1

- of which Italian 26.3 23.5 22.4 45.3 27.5

Other bonds 10.4 4.0 11.6 17.8 11.0

- of which Italian 1.3 1.2 1.4 3.6 1.7

Stocks and shares 17.9 21.9 13.3 12.2 16.1

- of which Italian 0.7 1.8 0.7 0.4 0.8

OICR (mutual funds) 8.0 25.1 14.5 9.3 12.6

- of which real estate - - 4.3 1.0 1.5

Real estate - - 10.7 - 3.4

Other liabilities and asset 0.6 0.4 4.8 0.3 1.8

TOTAL 100 100 100 100 100

- of which Italian 28.3 26.5 24.5 49.2 30.0

Fonte: Covip

10 Investments of PFs in Italy (end 2013; %)

17Source: our calculations on Covip data

CPF OPF Pre-existing PF Insurance contract

Total Fp

28.3% 26.5% 24.5%

49.2%

30.0%

71.7% 73.5% 75.5%

50.8%

70.0%

Italy Rest of the world

11 Investments of PFs in Italy (end 2013; %)

18Source: our calculations on Covip data

19

12 The efficient dimension of PFs

Source Covip

Fpc Fpa Pip "nuovi" Fpp Totale

Classi dimensionali degli iscritti N° Iscritti N° Iscritti N° Iscritti N° Iscritti N° Iscritti

> 100,000 4 884,317 1 127,258 5 1,289,621 - - 10 2,301,196

tra 50,000 e 100,000 7 498,647 1 64,977 - - 1 77,731 9 641,355

tra 20,000 e 50,000 12 483,384 13 424,248 8 251,887 9 242,446 43 1,438,266

tra 10,000 e 20,000 4 47,939 13 189,317 8 106,049 4 61,455 29 404,760

tra 1,000 e 10,000 8 54,287 23 102,741 35 120,521 70 239,042 136 516,591

tra 100 e 1,000 2 1,176 8 5,372 18 8,797 97 37,003 125 52,348

< 100 2 21 - - 2 149 180 2,243 184 2,413

Totale 39 1,969,771 59 913,913 76 1,777,024 361 659,920 536 5,356,929

13 FPs investment in Italy

• almost 30% of total asset is invested in Italy (essentially government bonds)

• Government bonds/securities are the privileged allocation

• Investment in capital market is very small and residual (less than 1% goes to Italian stocks)

• Hence, the inflow of financial resources to the Italian capital market is negligible/insignificant

• Effect of institutional investors (PF assets) on Italian economy is negligible

20

14 summing up….: main issues

• Membership: we need to increase the number of participants… (adhesions) Voluntary or compulsory..??

• Size of assets: now only 126 bn. of euro…

• too many small funds; hence, merger and restructuring… , cap on cost?

• Efficiency: Mefop estimates: 50,000/70,000 participants is the efficient size for closed Pension Funds

• Financial management needs to be more professional

14 Summing up: main issues• new MEF decree 166/2014 could significantly open up investment

opportunities for PFs…

• Very small home bias: investments concentrated in government bonds

• Italian economy does not benefit from financial assets managed by PFs (only 0.8% goes to Italian equities..!!)

• Private equities, real estate funds, private bonds, funds for SME…??

• the power of COVIP (supervisory body) has to be strengthened

15 challenges from the new legislation

• Workers may shift TFR to paycheck to finance consumption month by month, instead of devoting it to PFs; this will reduce the potential resources for PFs…

• A huge increase in taxation: instead of moving towards EET, as in most of OECD countries, we reinforced ETT: the second T has been increased from 11.5 to 20%

• New plan for a liberalization of the employer contribution; we rather need a real opening up of the market: full freedom of choosing any PFs for membership, deregulation of affiliation/membership