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

2. 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

3. 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.)

6. 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?

7. Fertility of baby boom generation

8. Source: European Commission (2012) From 4 active/ 1 retired to less 2 active/1 retired

9. Public spending for pensions as % of Gdp, EU 27 and Norway (2010) 9

10. 10 Public spending for pensions as % of Gdp, EU 27 and Norway (2060)

11. 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

12. 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

13. 6 Italian second pillar: the number of participants (memberships) December 2014December 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%

14. 7 Financial Assets managed by Pension Funds (billions of euro) December 2014December 2013% Occupational PFs Closed PF 39,645 34,50414.9% Pre-existing PF 50,380 50,376- Personal PF Open PF 13,960 11,99016.4% Insurance contracts 22,273 19,51314.1% Total 126,323 116,4438.5%

15. 8 Membership rate (gross and net) Source: Covip (2014) Membership rate Type of workers Enrolled Paying enrolled EmployedGrossNet Dependents private sector4,160,8983,488,47913,826,00030.1%25.2% Dependents public sector154,766152,4863,389,0004.6%4.5% Independent workers (autonomi)1,513,010995,6035,684,00026.6%17.5% Total5,828,6744,636,56822,899,00025.5%20.2% Total Workforce25,642,000 Membership rate in % workforce22.7%18.1

16. 9 The Asset Allocation of Italian PFs (end 2013) CFPOFPPPF Insurance contracts Total Deposits 3.45.65.96.65.0 Government Bonds 59.643.039.254.450.1 - of which Italian 26.323.522.445.327.5 Other bonds 10.44.011.617.811.0 - of which Italian 1.31.21.43.61.7 Stocks and shares 17.921.913.312.216.1 - of which Italian 0.71.80.70.40.8 OICR (mutual funds) 8.025.114.59.312.6 - of which real estate --4.31.01.5 Real estate --10.7-3.4 Other liabilities and asset 0.60.44.80.31.8 TOTAL 100 - of which Italian 28.326.524.549.230.0 Fonte: Covip

17. 10 Investments of PFs in Italy (end 2013; %) 17 Source: our calculations on Covip data

18. 11 Investments of PFs in Italy (end 2013; %) 18 Source: our calculations on Covip data

19. 19 12 The efficient dimension of PFs Source Covip FpcFpaPip "nuovi"FppTotale Classi dimensionali degli iscritti N°IscrittiN°IscrittiN°IscrittiN°IscrittiN°Iscritti > 100,0004884,3171127,25851,289,621--102,301,196 tra 50,000 e 100,0007498,647164,977--177,7319641,355 tra 20,000 e 50,00012483,38413424,2488251,8879242,446431,438,266 tra 10,000 e 20,000447,93913189,3178106,049461,45529404,760 tra 1,000 e 10,000854,28723102,74135120,52170239,042136516,591 tra 100 e 1,00021,17685,372188,7979737,00312552,348 < 100221--21491802,2431842,413 Totale391,969,77159913,913761,777,024361659,9205365,356,929

20. 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

21. 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

22. 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

23. 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