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International Seminar on Pensions 14 June 2001, Jerusalem, Israel Daniele Franco ITALY: THE ROLE OF FUNDING ITALY’S CRITICAL POSITION PENSION REFORM: MAJOR POLICY ISSUE A) High Pension spending: 16.0% of GDP in 1999 High incidence of pensions on total social spending (70%) B) Low fertility rate:1.2 children per woman of childbearing age POP65/pop15-64: 1990 2010 2030 21% 30% 48% C) High public debt (110% of GDP) LARGE GENERATIONAL IMBALANCE NEED FOR LARGER REFORMS A LONG REFORM PROCESS PENSION REFORM NECESSARY: to ensure fiscal consolidation and long-term sustainability to increase low participation rates to support non-elderly groups REFORM PROCESS FROM 1992: long, incremental, unfinished ROLE OF FUNDING: LIMITED, BUT GROWING DEVELOPMENTS UP TO 1950s EARLY HISTORY: PUBLIC, FUNDED, INDUSTRY-BASED SCHEMES; PAYROLL TAXES MAIN SCHEME - PRIVATE SECTOR EMPLOYEES: 1898 VOLUNTARY 1919 COMPULSORY (OLD AGE AND DISABILITY) 1942 SURVIVORS BENEFITS AFTER WW2: CRISIS OF FUNDED SCHEMES SHIFT TO PAY-AS-YOU-GO GUARANTEED MINIMUM PENSION LATE 1950s TO 1960s: EXTENSION OF COVERAGE EXTENSION OF PENSION COVERAGE: FARMERS (1957) ARTISANS (1959) OTHER SELF-EMPLOYED (1966) WORK-DISABLED CITIZENS (1966) LOW INCOME ELDERLY (1969) 1965: SENIORITY PENSIONS (35 YEARS CONTRIBUTIONS) FOR PRIVATE SECTOR WORKERS 1969: PRIVATE SECTOR EMPLOYEES FROM CONTRIBUTION-BASED FORMULA TO EARNINGS-RELATED 1969: FORMAL BENEFIT INDEXATION 1960s TO MID 1970s: EXPANSION OF WELFARE FUNCTIONS A) NEW BENEFITS (POOR ELDERLY AND DISABLED) ALSO, TO SUPPORT FARMERS AND POOR REGIONS: B) EXTENSIVE USE OF DISABILITY PENSIONS (SUBSTITUTE FOR UNEMPLOYMENT BENEFITS; POLITICAL PATRONAGE) C) EASY ACCESS TO MINIMUM PENSIONS ALSO, BREAKDOWN IN CONTRIBUTION-BENEFITS LINK: D) MINIMUM & MAXIMUM PENSIONS, SCHEMES WITH DIFFERENT RULES, DIFFERENT INDEXATION RULES 1980s: RATIONALISATION AND FURTHER EXTENSION FIRST STEPS TOWARDS REFORM 1983 MEANS TESTING FOR MINIMUM AND DISABILITY PENSIONS 1984 ELIGIBILITY REQUIREMENTS FOR DISABILITY TIGHTENED 1984 UNIFORM INDEXATION SYSTEM BUT: A) NO LARGE SCALE REFORM B) GRADUAL INCREASE IN BENEFITS FOR SELF EMPLOYED C) FREQUENT CHANGES IN RULES DISPARITIES DEPENDING ON YEAR OF RETIREMENT THE SITUATION IN THE EARLY 1990s RISING EXPENDITURE (CHART 1): 5.0 % OF GDP 1960 7.4 1970 10.2 1980 14.9 1992 1960-95 ELIGIBILITY RATIO = + 60% DEPENDENCY RATIO = + 60% TRANSFER RATIO = +15% PENSION EXP./GDP EXPECTED TO INCREASE FURTHER: CLOSE TO 25% BY 2030 ( DEPENDENCY & TRANSFER RATIOS) TREASURY (1994): “EQUILIBRIUM CONTRIBUTION RATE” FOR PRIVATE SECTOR EMPLOYEES 44 % 1995 50 2010 60 2025. REASONS FOR HIGH EXPENDITURE A) LOW RETIREMENT AGE (60/55 FOR PRIVATE SECTOR MALE/FEMALE EMPLOYEES) B) HIGH ACCRUAL RATE (2% OF EARNINGS FOR YEAR OF CONTRIB.) C) RELEVANT EARNINGS: LAST 5 YEARS IN PRIVATE SECTOR, FINAL SALARY IN PUBLIC SECTOR 40 YEAR CONTRIBUTION ABOUT 75% OF FINAL WAGE D) ELIGIBILITY TO OLD-AGE PENSION: 15 YEARS OF CONTRIBUTION E) INDEXATION TO EARNINGS OF EMPLOYED WORKERS F) USE OF PENSIONS TO SUPPORT SOME SECTORS AND REGIONS THE NEED FOR REFORM REFORM URGENT ALSO FOR: A) LABOUR MARKET REASONS DIFFERENT RULES JOB MOBILITY INCENTIVE TO RETIRE EARLY B) EQUITY REASONS MESSY DISTRIBUTIVE EFFECTS (UNEVEN RATES OF RETURN) LIMITED RESOURCES FOR OTHER SOCIAL POLICIES SHARP IMPROVEMENT IN CONDITIONS OF ELDERLY: POVERTY RATE = GENERAL POPULATION RATE THE 1992 REFORM - 1 EXCHANGE RATE CRISIS AND NEED TO CURB DEFICIT: PENSION SYSTEM EXTENSIVELY REFORMED A) RETIREMENT AGE. PRIVATE SECTOR EMPLOYEES: WOMEN FROM 55 60; MEN 60 65 B) “PENSIONABLE” EARNINGS: LAST 5 LAST 10 YEARS; YOUNG WORKERS: WHOLE WORKING LIFE C) ENTITLEMENT TO OLD-AGE PENSION: FROM 15 TO 20 YEARS OF CONTRIBUTIONS D) INDEXATION: FROM WAGE TO PRICE DYNAMICS E) SENIORITY PENSION FOR PUBLIC SECTOR EMPLOYEES: FROM 20/25 TO 35 YEARS OF CONTRIBUTIONS THE 1992 REFORM - 2 EFFECTS OF REFORM (+ TEMPORARY FREEZE ON INDEXATION): A) 25/30% OF PENSION LIABILITIES CANCELLED: EXPECTED EXPEND. B) GRADUAL HARMONISATION OF PENSION RULES C) STRONGER CONTRIBUTIONBENEFITS LINK BUT: A) SENIORITY PENSIONS REDUCE EFFECTS OF INCREASE IN RETIREMENT AGE B) PENSION EXP./GDP STILL EXPECTED TO INCREASE THE 1995 REFORM - 1 NEW MAJOR REFORM IN 1995 OBJECTIVES: A) REMOVE SENIORITY PENSIONS AND IMPROVE EXPENDITURE CONTROL B) REDUCE DISTORTIONS IN LABOUR MARKET (BY LINKING PENSIONS TO INDIVIDUAL CONTRIBUTIONS) C) IMPROVE HORIZONTAL EQUITY (HARMONISE RULES; REMOVE ADVANTAGES FOR WORKERS WITH DYNAMIC CAREERS) FROM DEFINED BENEFITS TO DEFINED CONTRIBUTION VIRTUAL FUNDING THE 1995 REFORM - 2 NEW RULES: A) OLD-AGE PENSION RELATED TO LIFE-TIME CONTRIBUTIONS (CAPITALISED AT GDP GROWTH RATE) AND TO RETIREMENT AGE (LIFE EXPECTANCY) CONTRIBUTIONS * AGE-RELATED COEFFICIENT ANNUITY B) FLEXIBLE RETIREMENT AGE: FROM 57 TO 65 WITH ACTUARIAL DISCOUNT (PROVIDED PENSION 1.2 “MINIMUM PENSION”) C) SENIORITY PENSIONS GRADUALLY ABOLISHED D) SAME RULES FOR ALL WORKERS CRITICAL ASPECTS: EXPENDITURE IN THE TRANSITION PENSION EXPENDIT. 16% GDP IN 1999 TREASURY PROJECT.: + 1.4% BY 2015 + 1.6% BY 2025 THEN DECLINE INPS 1998-2025: EQUILIBR. CONTR. RATE PRIV. SECT. EMPLOYEES: 45%48.5 SELF-EMPLOYED: 19.4%33.9 16.7%30.0 FURTHER INCREASES IN CONTRIBUTION RATES OR GENERAL TAXATION (47% GDP) NOT FEASIBLE INTERNAL MARKET, GLOBALISATION FACTORS MOBILITY TAX DEGRADATION - COMPETITION TREND TOWARDS LOWER TAX RATES CRITICAL ASPECTS: SYSTEM VULNERABILITY CONTRIBUTION-BENEFITS LINK FOR INDIVIDUALS, BUT SYSTEM VULNERABLE TO DEMOGRAPHIC & ECON. SHOCKS • BIRTH RATE: NO EFFECTS ON PENSIONS • LIFE EXPECTANCY: DELAYED EFFECTS ONLY ON NEW PENSIONS (VIA COEFFICIENTS) • GDP GROWTH: DELAYED EFFECTS ONLY ON NEW PENSIONS (VIA NEW CONTRIBUTIONS) • EARNINGS/GDP: DELAYED EFFECTS ONLY ON NEW PENSIONS (VIA COEFFICIENTS) CRITICAL ASPECTS: COMPOSITION OF CUTS REFORMS RELIES PRIMARILY ON REDUCING TRANSFER RATIO AVERAGE PENSION/PER CAPITA GDP: 15.5% 1998-2015 10.1% IN 2050 LIMITED REDUCTIONS IN NUMBER OF PENSIONS PENSIONS/EMPLOYMENT: 92% IN 1998 130% IN 2050 A) LOW RETIREMENT AGE (57-65): COEFFICIENTS? LABOUR DEMAND? B) (PARTIAL) PRICE INDEXATION: SUSTAINABLE OVER LONG RETIREMENT PERIODS? CRITICAL ASPECTS: EXPECTED MICRO EFFECTS ACTUARIAL CONTRIBUTION-BENEFITS LINK: INCENTIVE TO WORK/DELAY RETIREMENT BUT: LINK SHOULD BE TRANSPARENT AND PERCEIVED AS STABLE ACTUALLY: • LONG TRANSITION • EXPECT FURTHER CHANGES (VULNERABILITY) • LACK OF TRANSPARENCY (NO FORMULA) • EFFECTIVE CONTRIBUTION RATES IMPUTED RATES POLICY OPTIONS: ACCELERATE TRANSITION A) FASTER TRANSITION TO NEW RULES (DON’T APPLY TO WORKERS WITH 18 YEARS OF CONTRIB. IN 1995; WORKERS WITH 18 YEARS: APPLY ONLY TO NEW CONTRIB.) B) FASTER REMOVAL OF SENIORITY PENSIONS NO EFFECTS ON STRUCTURE OF SYSTEM, BUT POLITICALLY SENSITIVE (OLDER WORKERS) IMPORTANT TO FINANCE TRANSITION TO FUNDING POLICY OPTIONS: CHANGE 1995 PENSION REGIME A) SHIFT IN RETIREMENT BRACKET (eg: FROM 57-65 TO 62-70) B) STEEPER CONVERSION COEFFICIENTS C) MORE FREQUENT REVISIONS OF COEFFICIENTS (NOW: 10 YEARS) D) ADDITIONAL FACTORS CONSIDERD IN REVISIONS OF COEFFICIENTS E) COEFFICIENTS + ADJUSTMENT TO REAL GDP & DEMOGRAPHICECONOMIC CHANGES A & B: RETIREMENT AGE C, D & E: FASTER ADJUSTMENT TO SHOCKS POLICY OPTIONS: FUNDING AND PAYG CONTRIBUTION RATES TOTAL CONTRIB. RATES TO PAYG AND FUNDED PILLARS: 40% ASSUMING LONG CAREERS (25-65) & 3% REAL NET RETURN ON FUNDS: PENSION / FINAL WAGE 100% MARGINS TO REPLACEMENT RATE 10% CONTR. RATE REPL. RATE 75% OBSTACLES: A) SLOW DEVELOPMENT OF FUNDS B) BUDGETARY PROBLEMS C) NEED TO ENSURE RETIREMENT AGE NEED TO INCREASE RETIREMENT AGE ACTUAL AVERAGE RETIREMENT AGE IN 1995: MALES 60 YEARS FEMALES 57 YEARS (1997: 36% OF EXPENDIT. TO 65 YEARS) A) SUPPLY SIDE CHANGE IN RETIREMENT BRACKET INCENTIVES TO RETIRE LATER FLEXIBILITY (PART-TIME) B) DEMAND SIDE: LABOUR MARKET CHANGE IN LABOUR COST TRAINING SUPPLEMENTARY FUNDS LIMITED ROLE OF FUNDING IN ITALY: COLLAPSE OF FUNDS AFTER WW2 LACK OF TAX AND LEGAL FRAMEWORK UP TO 1993 EXTENSIVE DEVELOPMENT OF PAYG SEVERANCE-PAY FUNDS LITTLE DEMAND AND LITTLE RESOURCES FOR SUPPLEMENTARY PENSIONS 1990s: CONSENSUS TO DEVELOP FUNDS SEVERANCE-PAY FUNDS 7.4 % OF MONTHLY EARNINGS TO SEVERANCE-PAY FUNDS (of which 0.5 % to insurance fund) RETURN: 1.5 % + 0.75 * INFLATION RATE BENEFITS PAID OUT WHEN LEAVING EMPLOYER EMPLOYERS: CHEAP SOURCE OF FINANCE WORKERS: SOURCE OF LIQUIDITY IN UNEMPLOYMENT SPELLS CONTRIBUTIONS (PRIVATE SECTOR) 1 % OF GDP FUNDS 10 % OF GDP NEW LEGISLATION STRATEGY TO DEVELOP SECOND PILLAR: SEVERANCE-PAY + ADDITIONAL CONTRIBUTIONS SUPPLEMENTARY FUNDS GRADUAL PROCESS: MEMBERSHIP COMPULSORY ONLY FOR NEW ENTRANTS TWO TYPES OF FUNDS: (i) CONTRACTUAL (CLOSED) (ii) OPEN DEFINED CONTRIBUTIONS TAXATION: E - T - T CONTRACTUAL FUNDS FUNDS SET UP BY AGREEMENTS BETWEEN EMPLOYERS & EMPLOYEES AT COMPANY OR INDUSTRY LEVEL SELF-EMPLOYED ASSOCIATIONS CAN START FUNDS FUNDS INDEPENDENT FROM COMPANIES EXTERNAL MANAGEMENT OF ASSETS (BANKS / INSURANCE COMPANIES / OTHER FINANCIAL INSTITUTIONS) OPEN FUNDS FUNDS SET UP BY BANKS, INSURANCE COMPANIES, OTHER FINANCIAL INSTITUTIONS FUNDS INDEPENDENT FROM PARENT COMPANIES INDIVIDUAL OR COLLECTIVE MEMBERSHIP CAN MANAGE ASSETS DIRECTLY OR VIA FINANCIAL INSTITUTIONS SUPERVISION FUNDS TO BE AUTHORISED BY COVIP (PENSION SUPERVISORY BOARD) SUPERVISION BY COVIP + BANK OF ITALY AND INSURANCE COMPANIES SUPERVISORY BOARD COVIP EVALUATE IMPLEMENTATION OF TRANSPARENCY CRITERIA COVIP COLLECT AND PUBLISH DATA BENEFITS AT LEAST 50% OF CAPITAL AT RETIREMENT TO BE CONVERTED INTO ANNUITY ANNUITIES TO BE PAID BY (i) LIFE-INSURANCE COMPANIES OR (ii) PENSION FUND (BUT NEED REINSURANCE CONTRACT FOR DEMOGRAPHIC RISK) CHARACTERISTICS OF ANNUITIES TO BE DETERMINED BY PENSION FUNDS FUND MANAGEMENT CRITERIA 1) PORTFOLIO DIVERSIFICATION 2) MINIMISE TRANSACTION AND MANAGEMENT COSTS 3) MAXIMISE NET RETURNS CANNOT HAVE: (i) 15% OF ASSETS IN SINGLE ISSUER (ii) 20% OF ASSETS IN COMPANIES RELATED TO MEMBERS (30% FOR INDUSTRY FUNDS) (iii) 10% OF SHARES ON THE MARKET OR CONTROL ISSUER (iv) 20% OF ASSETS IN CASH TAX RULES • CONTRIBUTIONS contributions deductible up to 12% of annual salary or 5,000 Euro (but severance-pay contributions at least 50% of total contributions) • RETURNS reduced tax rate on returns (11% instead of 12,5%) • BENEFITS no taxation on benefits attributable to returns from capital; benefits attributable to capital component are subject to separate taxation (rate depends on years of work) TAX RULES Pension Funds (DC) Severance Payments Bond Investments CONTRIBUTIONS employer and employee total contributions are deductible up to the maximum of 12% of annual salary or 5,000 Euro no tax investment comes from savings, after personal income tax RETURNS reduced tax rate reduced tax rate on returns on accrued (11% instead of interest 12,5%); (11% instead of a negative result 12,5%) in one year can be deducted from future tax obligations BENEFITS no taxation on no taxation on no tax on capital returns from returns from or annuity at capital; capital; maturity benefits benefits attributable attributable to capital to capital component are component are subject to subject to separate taxation separate taxation tax rate on returns equal to 12,5% PROBLEMATIC ASPECTS - 1 (1) LONG PROCEDURES TO START FUNDS (2) SEVERANCE-PAY: EMPLOYERS LOSE CHEAP FUNDING EMPLOYEES LOSE LIQUIDITY (3) MODEST TAX INCENTIVES (4) LIMITED FREEDOM OF CHOICE FOR EMPLOYEES (TRADE-UNION INFLUENCE) (5) YOUNG WORKERS PROBABLY UNDERESTIMATE ISSUE; OLDER HAVE SIZEABLE PENSIONS PROBLEMATIC ASPECTS - 2 (6) UNEMPLOYED WORKERS CANNOT CONTINUE CONTRIBUTING (7) INCREASING MOBILITY (8) LACK OF INSURANCE FOR MANY SELF-EMPLOYED WORKERS, PART-TIMERS, ECC. (9) SUPERVISION: OVERLAPPING AUTHORITIES? INSTITUTIONAL INVESTORS’ PORTFOLIOS (1998 data unless otherwise indicated) Italy Germany France Spain Netherlands UK US 1998 1999 Bonds 78 68 62 58 56 46 20 39 Shares 19 29 32 36 13 49 74 58 Deposits and cash 3 3 6 6 31 5 6 3 100 100 100 100 100 100 100 100 Unconsolidated assets 80 98 70 116 69 156 214 219 Consolidated assets 69 80 Total Memorandum items (as a percentage of GDP): Percentage shares of institutional investors' total net assets Investment funds 43 44 44 43 61 10 12 27 Insurance companies 17 17 51 57 36 36 49 20 Pension funds 7 5 5 - 3 53 39 39 Other institutions 33 34 - - - 1 - 14 INSTITUTIONAL INVESTORS: net fund-raising and assets under management (billions of lire and, in brackets, percentage of GDP) End of period stocks Percentage composition 1999 2000 1999 2000 Investment funds 920,311 (43%) 871,188 (39%) 43.1 39.7 Insurance companies 355,264 (17%) 415,145 (18%) 16.6 18.9 Pension funds 141,239 (7%) 148,114 (7%) 6.6 6.8 Portofolio management services 716,985 (33%) 759,234 (34%) 33.6 34.6 Total … 2,133,799 (99%) 2,193,681 (97%) 100 100 Consolidated total … 1,734,048 (81%) 1,704,050 (75%) Pension funds in Italy: summary data (billions of Italian lire) Funds Members 31.03.01 31.12.00 31.12.99 Benefits 2000/1999 2000/1999 End 2000 % % End 2000 New pension funds Contractual pension funds Licensed to conduct activity 23 23 6 782,821 2,305 Licensed only to enroll subscribers 20 19 27 102,830 - Total 43 42 33 885,651 Licensed to conduct activity 84 85 79 223,032 1,068 Licensed to establish 14 14 9 - - Total 98 99 88 223,032 63.6 1,068 136.3 141 141 121 1,108,683 32.4 3,373 124.0 COVIP jurisdiction 418 417 579,600 40,788 Legally incorporated 398 397 556,077 40,465 Other funds 20 20 23,523 323 Within banks 151 152 100,000 14,000 8 8 4,295 516 Total 577 577 683,895 55,304 Grand total 718 718 1,792,578 58,677 26.3 2,305 118.7 Open pension funds Total numbers New pension funds Old Pension Funds Within insurance companies PENSION FUNDS: ASSETS (billions of lire; in brackets millions of euros) 1999 Social 2000 Pension Funds Insurance Schemes Old New Funds Funds Cash and deposits 23,458 (12,115) 1,079 (557) 94 (49) Bonds 11,532 (5,956) 27.699 (14,305) of which: Government bonds 9,125 (4,713) Pension Funds Insurance Schemes Old New Funds Funds 24,631 (12,721) 25,814 (13,332) 1,593 (823) 210 (109) 897 (463) 40,128 (20,724) 11,743 (6,065) 28,573 2,007 42,324 (14,757) (1,037) (21,858) 12,013 (6,204) … (…) 21,138 (10,917) 9,312 (4,809) 11,469 (5,923) … (…) 20,781 (10.733) 988 (510) 10,779 (5,567) 347 (179) 12,113 (6,256) 1,088 (562) 11,747 (6,067) 776 (401) 13,610 (7,029) 8,216 (4,243) 9,291 (4,798) 169 (88) 17,676 (9,129) 6,195 ((3,199) 9,849 (5,086) 379 (196) 16,423 (8,482) 39,717 (20,512) 6,973 (3,601) (-) 46,690 (24,114) 39,868 (20,590) 8,271 (4,272) (-) 48,139 (24,862) Total … 83,911 55,821 (28,829) 1,507 (778) 141,239 (72,944) 84,708 (43,748) 60,033 3,373 148,114 (31,004) (1,742) (76,495) Shares Loans and other financial assets Real estate Social (43,336) Total Total 27,618 (14,263) Old Pension Funds: Summary Data 1999 Number of funds 2000 417 417 573,256 579,600 Old age and disability pensions 79,522 80,920 Survivors’ pensions 27,637 27,894 Contributions (billions lire) 3,310 3,532 Benefits (billions lire) Pensions Lump-sum 2,830 1,124 1,706 2,679 1,170 1,509 38,452 40,788 6,4 6,7 10,7 10,8 56,5 59,2 Members Assets (billions lire) (millions of lire) Average contributions per member Average benefits per pensioner Average assets per member Old Pension Funds: types of funds (year 2000) Category Defined Defined Contribution benefit Mixed Total 86,510 579,600 409,930 83,160 2,627 427 477 3,532 1.,253 356 301 1,910 worker 882 71 102 1,055 severance-pay 492 0 74 567 21,838 29,043 30,039 80,920 Survivors’ pensions 7,904 9,257 10,733 27,894 Benefits (billions lire) 1,593 609 476 2,679 277 545 347 1,170 1,316 64 129 1,509 Members Contributions (billions lire) employer Old age and disability pensions pensions lump sum Old Pension Funds: assets by type and activity (year 2000 - billions of Lire) Type Defined Defined contribution benefit Mixed Total Assets Cash 589 464 103 1157 3. Bonds 5.625 5.846 4.386 15.857 52. Shares 951 756 423 2.131 7, Investment fund units 1.746 427 867 3.040 10, Real estate 1.849 2.061 1.143 50.53 16, Real estate companies 854 238 194 1.285 4, Other assets 855 729 264 1.848 6, 12,469 10,521 7,380 30,371 100, 12.100 10.169 7.275 29.544 369 352 105 827 12.469 10.521 7.380 30.371 Total Liabilities Liabilities related to benefits Other liabilities Total Contractual pension funds: members and potential members (end of year 2000) Funds Members Potential members % Contractual pension funds licensed to conduct activity 23 782,821 6,194,347 Employees 18 767,696 2,354,347 32.6 Company and group funds 6 167,727 219,594 76.4 Funds managed on behalf of labour categories 2 441,651 1,185,000 37.3 Other funds 10 158,318 949,753 16.7 Self-employed 5 15,125 3,840,000 Contractual pension funds licensed only to enroll subscribers 19 102,830 9,678,803 Employees 15 100,836 7,597,567 Self-employed 4 1,994 2,081,236 Total funds 42 885,651 13,073,150 Employees 33 868,532 9,151,914 Self-employed 9 17,119 3,921,236 Contractual pension funds geographically defined 4 61,718 630,000 Employees 3 60,531 577,000 Self-employed workers 1 1,187 53,000 Contractual Pension Schemes: Average Contribution Rates Young workers Older workers Employees 1.15% 1.15% Employers 1.15% 1.15% Severance-pay contributions 6.91% 2.39% Total 9.21% 4.69% Main Contractual Funds Composition of assets (31.12.2000 – percentage points) Fonchim Cometa Fondenergia Quadri e Capi Fiat Fondo dentisti Total Cash 5.8 1.3 5.4 6.6 32.6 3.8 Bonds 68.1 79.4 70.6 67.7 34.6 73.7 Shares 24.7 16.9 21.0 26.2 14.2 20.5 Other 1.4 2.4 2.9 -0.6 18.5 2.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 Open Pension Funds: Assets (31-12-2000 - percentage points) Sharebased Balanced Bondbased Total Cash 10.4 11.5 13.9 11.5 Bonds 8.9 35.8 60.5 28.9 Shares 43.2 23.4 4.4 28.4 Investment funds 36.4 29.4 20.4 30.8 Other 1.1 -0.2 0.8 0.5 Total 100.0 100.0 100.0 100.0 Age Distribution: Contractual Pension Funds vs Social Insurance Scheme of Private Sector Employees Open Pension Funds Structure of the Market (31-12-2000) Funds/Schemes Members Number % Open pension funds promoted by: Insurance companies 35 43,181 19 3 43,774 19 Fund manag. companies 32 136,077 60 Total open funds 70 223,032 100 Share-based 64 107,480 48 Balanced 72 83,083 37 Bond-based 126 32,469 14 Total schemes of funds 260 223,032 100 Banks Schemes Age Distribution of Members: Open Pension Funds vs Social Insurance Schemes of Self-Employed Workers Open Pension Funds: Asset Composition and Age Distribution of Members Contractual and Open Funds: rates of return (percentage points) Average 1999-2000 1999 2000 Contractual funds .. 3.6 .. Open funds 24.0 2.9 12.9 Share-based 46.1 0.7 21.3 Balanced 19.8 4.5 11.9 Bond-based 4.4 5.9 5.2 Return on severance-pay funds 3.1 3.5 3.3 CONCLUSIONS - 1 A) USE OF SEVERANCE-PAY CONTRIBUTIONS CORRECT, BUT PROCESS SLOWER THAN EXPECTED B) DEVELOPMENT OF FUNDING SLOW WHEN (i) PAYG CONTRIBUTIONS AND BENEFITS VERY LARGE AND (ii) PUBLIC FINANCE TIGHT C) CLOSE LINK WITH PAYG REFORM: DEVELOPMENT OF SUPPLEMENTARY PENSIONS NECESSARY TO REFORM PAYG, BUT PAYG REFORMS NECESSARY TO ALLOW ROOM FOR CONTRIBUTIONS AND TAX INCENTIVES CONCLUSIONS - 2 D) IS IT OPTIMAL TO COMBINE PAYG DEFINED CONTRIBUTION PENSIONS WITH FUNDED DEFINED CONTRIBUTION PENSIONS? E) POSITIVE MEMBERSHIP TREND F) MAIN OPEN ISSUES: (i) PUBLIC SECTOR FUNDS; (ii) FREEDOM OF CHOICE OF FUNDS; (iii) SUPERVISION; (iv) LENGTHY PROCEDURES G) CAN EXPECT IMPORTANT CHANGES IN CORPORATE GOVERNANCE WHICH LESSONS FROM ITALY? A) LATE REFORM PAINFUL AND LESS GRADUAL (EG 5 YEARS RETIR. AGE OVER 8 YEARS) B) LENGHTY REFORM PROCESS: UNCERTAINTY AND PEOPLE RETIRING EARLY ( EXPENDITURE) C) DIFFERENT SCHEMES & RULES REFORMS HARDER D) SPECIAL INTEREST GROUPS: MIXED EXPERIENCE * PUBLIC SECTOR WORKERS ACCEPTED BIG CUTS; * RETIREMENT AGE INCREASED FAST; * SENIORITY PENSIONS RETAINED WHY PENSION EXPENDITURE IS SO LARGE IN ITALY? ITALY: PENSION-BIASED SOCIAL PROTECTION SYSTEM OLD-AGE+SURVIVORS / TOTAL EXPEND.: 63% IN ITALY; 42% IN EU INERTIAL EFFECTS OF DECISIONS TAKEN IN 1950s AND 1960s SEGMENTATION OF SYSTEM: SEGMENTED POLICY-MAKING LOW DEPENDENCY SCHEMES HIGH RETURNS; HIGH DEPENDENCY SCHEMES SUBSIDISED BY GOVERNMENT LACK OF ESTIMATES OF LONG-TERM EFFECTS WHY WAS THE REFORM DELAYED UP TO 1992? NEED FOR REFORM RECOGNISED IN LATE1970S, NO ACTION UP TO 1992 SHORT-TERM VIEW OF BUDGETARY DEVELOPMENTS NO AGREEMENT ON EXPENDITURE TRENDS NO AGREEMENT ON CHANGES: FUNDING, GENERAL REVENUE FINANCING SEGMENTATION OF SYSTEM: UNEVEN BURDENS SIZE OF PENSION WEALTH & NUMBER OF PENSIONERS THE ROLE OF FORECASTS ITALY: PROJECTIONS FROM PUBLIC INSTITUTIONS ONLY IN LATE 80S INITIALLY, OPTIMISTIC PROJECTIONS RELIABILITY IMPROVED IN 1990S FREQUENT CHANGES; REVISIONS USUALLY UPWARD PROJECTIONS INFLUENCED REFORMS - PERHAPS POLITICAL DECISIONS TO ACCELERATEPOSTPONE REFORMS INFLUENCED FORECASTS POLICY IMPLICATIONS: NEED REGULAR REVISIONS NEED ANALYSIS OF CHANGES AN INDEPENDENT AUTHORITY? HAS POLICY-MAKING CHANGED AFTER 1992? (1) IMPORTANT CHANGES: FROM EXPENDITURE EXPANSION TO EXPENDITURE REDUCTION MAIN ACTORS IN POLICY: TREASURY AND PRIME MINISTER BEFORE 1992: ADVANTAGEOUS RULES FOR PUBLIC SECTOR EMPLOYEES AND SELF-EMPLOYED AFTER 1992: LOWER BURDEN FOR PRIVATE SECTOR EMPLOYEES PRESSURE GROUPS: FROM EMPLOYMENT TO GENERATIONAL DIVISIONS HAS POLICY-MAKING CHANGED AFTER 1992? (2) BUT: REFORMS STILL INTRODUCED WITHOUT PRELIMINARY WORK NO GOVERNMENT DOCUMENTS ABOUT NEED FOR REFORM, OBJECTIVES, ETC. INCREMENTAL APPROACH: UNCERTAINTY ABOUT FURTHER CHANGES IN PAYG SYSTEM + SLOW DEVELOPMENT OF FUNDING UNEVEN BURDEN: PROTECT VOCAL GROUPS E.G. LOWER BURDEN ON WORKERS WITH LONG RECORDS EMPLOYMENT RATES