Pensions belonging to the second and third mainstay
The management of the new additional insurances
Proposal evaluations
It is possible, and I believe even useful, to do a critical examination of the supplementary pensions’ situation independently from what will happen in the end when the reform is adopted. The reflections and the ideas coming from several positions are illustrative of the existing tensions and interests. When this article is published everything should be defined; in my opinion this doesn’t play down the interest we must have on the sequence of events. Today –June 2004–, with the behaviour of the legislative unit in charge of the Supplementary Pension’s reform, the analyses on the necessary nature of the instruments for a correct management of the new social security are topical.
We start from the assumption that the instruments can be compared among them when referring to the benefits and taking into account the advantages and disadvantages they involve. We must consider that there are great interests gear, in fact the Tfr transfer – (Trattamento di fine rapporto)“ Severance pay”, in other words the new Supplementary Pensions’ final payout, as well as of possible voluntary payments, is valued in approximately 15/20 billions of Euros. This is therefore the occasion to start up the growth of the Pension Funds and provide the Italian population with the possibility to confront the Public System’s reduced capacity –first mainstay– to guarantee adequate pensions. The instruments available, outside of the Public System (first mainstay) are essentially two: the Open Pension Funds with a financial nature (second mainstay), which are based on the capitalization system. The third mainstay is based on the proceedings carried out in the Insurance scope. On the dualism of these last-mentioned is where the debate existing in Italy develops. They are contrasting thesis that declare that their aim is the defence of the pensioners’ interests with the integration of the worker’s – saver- pension, essential to allow him to maintain when he reaches the retirement age, an adequate standard of living.
The following opinions have been obtained from articles published in the Financial Daily Paper “Il Sole 24 Ore” (The Sun 24 hours) signed by: Dario Frigerio and Giordano Lombardo – Managing Director and Global Manager Pioneer Investments; Fabio Cerchiai - Area President; Guido Cammarano President Assogestioni; Isabella Della Valle and Federica Pezzetti; Luca Mainò - “Consultique”, and from the Daily Paper “La Stampa” signed by Anna Messia. Summary of the thesis compared as seen according to the Financial Management’s point of view:
OPEN PENSION FUNDS WITH A FINANCIALNATURE
• Total separation and autonomy of the patrimony with regard to constituent subject, guarantee that ensures that the constituent subject is not distracted from the social security’s aim, and that the characteristics of transparency are protected. The structure and the operational organization, through a depositary Bank, are designed so the saver can look after the pension he has been building up.
• Possibility to exercise the right to vote in the meetings where the Pension Fund invests.
• Portability, that is, the faculty of the saver to pass from a tool to another, with the exact quantification of
the achieved management performance up to the moment of the transfer.
• Valuation of the patrimony according to the prizes of the current market so the partial results obtained
are always under control in order to carry out the necessary adjustments.
• Possibility to ensure a minimum guaranteed output of the managed patrimony using the financial technology and not the principle of mutuality. In this case the manager hasn’t the necessity to keep back a part of the extra output, as the insurance manager would do, since he is able to determine with precision, and continuously, how far or near is he from reaching the guaranteed output.
• Defined costs, lower than the insurance management. An interesting data can be the one relating to the Open Funds’ investments in the Common Funds and the Sicav. In this case the regulation establishes that the expenses coming from the purchases and the rights related to subscription and the reimbursement of the bought funds must not place a tax on the Pension Funds, neither the operating expenses in order to avoid a duplication of the cost involving the expenses will have to be met by the saver. In the Insurance Pip or Fip (Complementary Pension Plans/Funds) this kind of protection doesn’t exist, in fact those expenses derived from the Funds and from the underlying Sicav are added to the product’s expenses.
MANAGEMENTS WITH AN INSURANCE BASIS
• The legislative provisions stipulated through the Decree no. 124 / 1993 and in accordance with the
Law no. 335 / 1995, establish the equalization of the rules and the costs. The Insurance companies have presented an amendment (that has been rejected) before the Senate asking about the possibility the Supplementary pension’s Insurances were managed in the scope of the first and the fifth sector and not by means of the sixth branch, as established previously, and therefore the management of the investments will be followed from the Insurance Management’s point of view and not from the Financial Management’s point of view. This would also mean that, for the patrimonies managed nowadays the company’s patrimony separation cannot be applied, meaning that they can only be identified and distinguished by means of a subsequent certification of the patrimony itself, whose criterions are still to be defined; the problem is that not even the depositary Bank nor the report of activities knew how the output’s rate would be determined, based on the company’s adequacy to the market conditions.
• The right to vote would pass to the Insurance Companies. In fact there would be an important administrative complication provoked by the Fund’s direct right to vote, this is, therefore, a significant limitation for the active participation in the “governability” of the companies were the Funds are invested.
• More difficulties when transferring each position to other funds and less transparency of the individual
position. In this case the lack of transparency, separation and, also, the lack of a report free from ambiguity
appears to be clear
• The growth of the trend towards the valuation of the patrimony according to the historical cost rather than following the current prices, this would make the patrimony more stable and would, therefore, reducing, the volatility’s effect attributable to the market’s price fluctuations. In fact this would not stop this volatility from asseting its value again, in the long term, with unexpected prices.
• Minimum output guaranteed on the patrimony managed, witholding a part of the extraordinary output in what has to do with the guarantee. In other words, the company by means of the criterions established by the ISVAP determines the output and taking into account what other competing insurance companies offer.
• The costs are of difficult to identify, though the continue being much higher than the Open Pension Funds, sometimes so difficult to justify in front of the need to guarantee outputs in the long term. The Policies require higher expenses than in the first years, and in some cases the initial premium is reduced up to a 30 or 40 per cent.
AND REFERRING TO THE INSURANCE MANAGEMENTS
• They protest against the law excluding the first and fifth sector’s traditional insurance managements, whose contribution to the supplementary pension is essential, with its financial and demographic guarantees, in all countries. They don’t see the need of limiting by means of a law the faculty of managing the Pension Funds, which are certainly capable of choosing the best options with regard to the management of the insurance as a bank-holding company, according to the advantages and the disadvantages of the output’s terms, risk, guarantees, duties of information and the right to vote.
• They insinuate that the true reason of the hostility comes from the fear to the insurance companies’ competitive ability. In fact, in accordance with the survey they carried out, the majority of the funds existing before the 1993 Law had chosen the Insurance Company’s Management. These fears must not exist. If we intend to protect our savings as best as we can and make the markets more efficient, we can’t expect to reach these aims by controlling the existing competition and the freedom of choice.
• The Insurance Companies are strong institutional investors that, most probably carry out a prudent financial management, and contribute with their investments in Treasury Bonds and shares, and with their management orientation’s in the long term the contribute to reach a stability in the financial markets and, also, contribute to the country’s economic and industrial development.
• The Insurance scheme’s management is developed by means of the so-called Pip or Fip, mainly in the branch including life insurances, in other words, in the first sector. They are individual adhesion Open Funds, to which, however, neither the “Tfr” nor the employer’s contribution are added up, as stipulated in the Decree no. 47 / 2000. On the contrary, an amendment establishing a wider possibility of comparison between all the prevision options has been adopted, including the individual options, allowing to add the transfer of the “Tfr” and of the employer’s contribution to these last prevision options. With all these measures, an opening to the freedom of the market we all hope is intended.
• They are contrary to the continuous accountancy mechanism according to the invested resources because with the current valuation we can corrections that not always seem to be appropriate can be done.The fact of valuing the management of the Insurance Company’s investments allows, however, an attenuation of the annual volatility.
A PROJECT INVOLVING THE TREASURY
The project prepared by the Treasury technicians for the Special Pension Funds in the INPS (National Institute of the Social Security) is also taken into account. A hypothesis that, however having overlooked a part of the “Maroni” commissioned Law that ruled the Supplementary Pension, is still inactive. In this Fund the “Tfr” accrused and rose because of the administrative silence would converge. According to the Treasury, this “Tfr” accrused and raised should amount to 7 thousand million Euros, from the 13 representing the liquidations’ annual flow. This solution would also provoke, always according to the Treasury technicians, an effect on the objectives related to the classification between the deficit-GDP ratio, valid for Eurostat because it would be registered as a down payment in the Institution and, therefore, would have an influence in the Public administration’s balance.
EVALUATIONS
The distribution channel influences the costs falling on the savers. For the Closed Funds the costs are moderated (contracts awarded by private treaty), for the Open Pension Funds the costs are higher (banking channel), while for the Pip or Fip, the distribution channel is more onerous (insurance companies and promoters) is the cause of a high cost level. Going back to what was mentioned when referring to the investments in Common Funds and Sicav, the following question comes up: if the law referring to the Open Funds, with regard to the cost duplication is applied to the Pip, how will it be accepted if we take into account that the Internal Pip Funds’ managers would suffer a remuneration reduction?
In what concerns the SGR (Savings Management Societies) and the Insurance Companies, the costs oftheir products, that are still remaining high, will have to be reduced and, at the same time, be made moretransparent. In fact, the Closed Funds’ annual commissions reach between 40 and 50 points. The Open Funds reach, approximately, 1.50% and the rate of the policies is between 2.50 and 3%.
We have to ask ourselves weather these instruments are going to improve the Tfr. Nowadays theannual reserves have been uprated in a 75% of the inflation, plus a 1.5% belonging to a fixed interestrate. Those products assigned to the pensions will have to show they can go beyond this rate. This hasnot happened in the last three years because of the losses in shares and bonds, no matter whether they are closed or open, though the results obtained in 2003 turn the situation described upside down. Pioneer Investments’ empowered delegate has said that we can reason thinking in the long term, and this way the fact that the shares are more profitable than the bonds, and therefore more profitable than the Tfr, will be proved
The President of Assoprevidenza, Sergio Corbello, thinks that the adjustment between the Pension Funds and the policies offered by the Insurance Companies is fare as long as the principles of comparability, transparency and portability are protected. Remembering the importance, for instance, in America of the Individual Funds, a successful example that reaffirms the importance of the Supplementary Pension’s wide development and also how important fair competition is. Mr Corbello also foresees that in a non-theorical context the Tfr the flows would essentially meet in the Transferable Securities, which guarantee a wider dialogue with the Fund itself and are convenient when referring to the cost level. In those cases where the possibility of creating “ad hoc”
Funds doesn’t exist, and adhesion with Open Funds will carried out. In any case, enhancing security will
be necessary. For the San Maolo IMI Wealth Management’s Empowered Delegate, the complementarity existing between the insurance and financial instruments and the link formed by the financial management and the Insurance Companies, excluding antagonism, is very important. The distinctive characteristics of the managed saving need to be taken care of and reinforced; these characteristics are: transparency, protection against risks and discipline in order to avoid antagonism and to reinforce the first and fifth sector’s management. Following his words we can see he reveals
benefits.
He concludes saying that we can always lean on the golden rule, in the election of the allotee’s investment choices, in chasing the aim of the standard of living’s sustainability, instead of basing ourselves on the risk individual tendency. However, the debate remains open and there might be some problems when coming down to set the changes provided in motion. These possible problems are caused by the short space of time (six months) elapsed since the passage of the law to the decision making about the Tfr by the savers and, also, the decision making concerning the creation of Individual Funds suitable enough to come up to the new provisions.
According to “Consultique’s” way of thinking, and in order to guarantee a wider transparency and the possibility of purchasing the products, using costs homogeneous indicators, also for the Pip, such as the TER (total expense ratio), would be necessary because it is used to calculate the annual costs raising a charge on the Common Investment Funds and the Sicav and enhancing, at the same time, the rest of the costs raising a charge on the pension products. According to the Financial Managers, there is no possible alternative between the Pension Funds managed with financial methods and the Insurance Companies’ management.
In addition, there is no intention of banning the (fare) competition between the intermediaries, but an intention to distinguish the products that are not comparable among them. Though we all want that more and more people are able to benefit themselves from appropriate solutions to the prevision problem, we must not mistake this aim with the will of setting all the instruments to the same level, no matte if they are going after completely different aims.
SUMMARIZING
Actual situation: those employees wanting to save in order to ensure their supplementary pension, and receive a) tax reductions, b) the employer’s contribution and c) the Tfr unblockment, are obliged to engage under contract with the respective companies/ categories a Pension Fund where the interest rate can be negotiated
The Companies’ aims: the Companies want the employees to also be able to engage under contract the individual policies belonging to the first and the fifth branch (Pip/Fip) and, also, to be able to take advantage of points a), b) and c) without having to register preventively in a Pension Fund where the interest rate can be negotiated. It may seem that the problem doesn’t deserve our attention, because it has nothing to do with today’s retired population, but this is not entirely true because we belong to the European Platform AGE and we have to learn to face all the problems that, apart from affecting us directly, affect today’s workers; in other words, tomorrow’s pensioners. This paper presentation intends to be a contribution to the debate that is being carried out in Europe, I believe that what happens in a country of the UE also concerns the rest of the memberstate countries. In my opinion, we must focus our efforts in those subjects willing to affect us, and I wish that the information could circulate more fluently between us.
Franco Salza President Federazione Nazionale Sindacale Delle Associazioni dei Pensionati del Credito
Franco Salza
President Federazione Nazionale Sindacale
Delle Associazioni dei Pensionati del Credito
