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 K iev - May 27th, 2004
AGENDA <ul><li>OPENING REMARKS </li></ul><ul><li>ITALIAN PENSION SYSTEM REGULATORY FRAMEWORK AND KEY FINDINGS </li></ul><ul><li>CONCLUSIONS </li></ul><ul><li>ANNEX: </li></ul><ul><li>SANPAOLO WEALTH MANAGEMENT – HIGHLIGHTS </li></ul>
1. OPENING REMARKS <ul><li>A. The development of private pension systems (pillars II and III) in Eastern Europe could leverage on previous international experiences, mainly in terms of: </li></ul><ul><ul><li>- regulatory framework results </li></ul></ul><ul><ul><li>- asset managers professional know-how </li></ul></ul><ul><li>B. Regulators should enable domestic players to complement their competence/offering through: </li></ul><ul><ul><li>The acquisition of products/capabilities managed by foreign specialized players, and/or </li></ul></ul><ul><ul><li>The outsourcing of specific asset classes delegated to international portfolio managers </li></ul></ul><ul><li>C. The access to international markets/asset classes should be coupled with a solid system of checks and balances </li></ul>
2. ITALIAN EXPERIENCE: SUMMARY <ul><li>Pension system regulatory framework still based on pillar I and evolving over time towards: </li></ul><ul><li>- retirement age increase and reduction of replacement ratio </li></ul><ul><li>- increased allocations on pillar II and III to cover pension gap (1) </li></ul><ul><li>Effectiveness of supervision activities </li></ul><ul><li>B. Complementary pension system still small but growing </li></ul><ul><li>C. Pension funds adherents experienced good performance and stability despite major financial shocks , thanks to: </li></ul><ul><ul><li>Leverage of competence and know-how from one of the largest European asset management industry </li></ul></ul><ul><ul><li>Wide range of investment products/markets available to portfolio managers in a well regulated environment </li></ul></ul>1) Calculated as the first pension payment vs. last salary received
2. ITALIAN PENSION SYSTEM REGULATION 1) Calculated as the first pension payment vs. last salary received 2) 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 contributions Source: CERP; Eurisko multifinanziaria; Bankit General report on economic trend in Italy FOCUS ON REDUCING PUBLIC DEBT ACTION TO COVER PENSION GAP <ul><li>PILLAR I </li></ul><ul><li>PILLAR II AND III </li></ul>Amato Reform ‘92: Increased retirement age and contribution period Law ‘93 First regulation of complementary pension schemes (pillar II) Dini Reform ‘95 In pillar I, introduction of defined contribution system and gradual phase out from pay-as-you-go (PAYG) system Prodi Reform ‘97 PAYG phase out acceleration Law ‘00 Introduction of Private Pension schemes (III pillar) Maroni Law Proposal ‘04 Enforcement of the complementary pension system (Mandatory TFR (2) conversion to pension funds) Pre-pension Reform (90s) Post-pension Reform (Amato+Dini) Pension Gap PENSIONS GAP REPLACEMENT RATIO (1) 0 20 40 60 80 100 97,1 62,7 34,4
2. REGULATORY ENVIRONMENT <ul><li>Dedicated Supervision Authority </li></ul><ul><li>Separate role for close-ended pension fund Sponsor and Portfolio Managers </li></ul><ul><li>Custodian Bank with mandatory monitoring functions on Portfolio Manager activities </li></ul><ul><li>Portfolio Managers can access diversified markets/products </li></ul>Market / Products Pension Fund Sponsor Portfolio Managers Custodian Bank Supervision Authority - COVIP Adherents/ Members Source: ABI, Covip website, Legislative Decree n.124/1993
2. PENSION FUND SYSTEM EVOLUTION (1) OPEN-ENDED PENSION FUNDS - AUM (MM Euro) +215% CLOSE-ENDED PENSION FUNDS - AUM (MM Euro) +315% +282% N.° members N.° members 222.032 364.604 550 1.731 4.543 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 <ul><li>Funds established after 1993 </li></ul><ul><li>Note: Percentage calculated as total pension funds AUM on AUM net of duplications of Asset Management industry </li></ul><ul><li>Source: Covip, Annual Report 2003 </li></ul>
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 taxes 2) Semi logarithmic scale; base 100 as May 31 st , 1982 Source: 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
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 <ul><li>REGULATORY GUIDELINES </li></ul><ul><li>Risk diversification </li></ul><ul><li>Attention to conflict of interests: strategic and tactical asset allocations managed by different subjects (for close-ended funds) </li></ul><ul><li>Dedicated Authority (Covip) to monitor pension fund investments </li></ul>
2. THE ITALIAN ASSET MANAGEMENT MARKET (1) Mutual Funds Life insurance Technical reserves Discretionary Portfolio Management 1.231 (1) Gross of duplication Source: 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 85 194
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 5 1) 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
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
3. CONCLUSIONS - Open access to international markets and multiple asset classes Professional Asset Managers key principles Positive findings of Italian regulatory system <ul><li>Portfolio diversification and dedicated expertise </li></ul>- 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
ANNEX - SANPAOLO WEALTH MANAGEMENT- HIGHLIGHTS <ul><li>Products/Services: </li></ul><ul><li>Institutional mandates </li></ul><ul><li>Strategic/tactical asset allocation advisory </li></ul><ul><li>Selection/monitoring of third-party institutional managers </li></ul><ul><li>Products/Services: </li></ul><ul><li>Umbrella fund (40 sub funds) </li></ul><ul><li>Management of third- party funds and dedicated SICAVs </li></ul><ul><li>Management of life insurance products </li></ul><ul><li>Advisory services on capital protection techniques </li></ul><ul><li>Full service provider </li></ul>(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)
CONTACTS Filippo Reda +39 02 30347 2253 E-mail [email_address] Sanpaolo Wealth Management Head of Sales Riccardo Pola +56 2 381 3434 E-mail [email_address] l Sanpaolo IMI Deputy Manager - Chile
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