ITALY: Europe's biggest age problem Matthew Edwards Watson Wyatt

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ITALY Europe's biggestage problemMatthew
EdwardsWatson Wyatt
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Italy Europe's biggest age problem

• Introduction
• Demographics
• Economic context
• Pensions reform
• Lessons for other markets?

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Demographics

• Summary
• Longevity
• Reproduction
• Immigration
• Early retirement
• Conclusion

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Demographics

• Italian population 2000

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Demographics

• Italian population 2030

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Demographics

• Italian population projection 2000-2050

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Demographics

• Old age dependency ratio
• number of pensioners per working age member of
  the population
• Italy now 29-30
• 3 workers per pensioner
• Italy in 2050 67-69
• 1.5 workers per pensioner

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Demographics

• Longevity
• has increased
• continues to improve
• similar to other OECD countries

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Demographics

• Summary
• Longevity
• Reproduction
• Immigration
• Early retirement
• Conclusion

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Demographics

• Reproduction
• the lowest in Europe!
• 1.2 children / woman
• been the lowest for a long time
• will it ever improve?
• Reasons?

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Demographics

• Reasons?
• marrying later
• children later in marriage
• fewer children (more working women)
• increased materialism?
• effect of increased taxation?

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Demographics

• Summary
• Longevity
• Reproduction
• Immigration
• Early retirement
• Conclusion

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Demographics

• Summary
• Longevity
• Reproduction
• Immigration
• Early retirement
• Conclusion

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Demographics

• Early retirement
• Italy has one of the highest propensities for
  early retirement
• Looking at the proportion of males aged 55-59 who
  are working ...

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Proportion of males aged 55-59 who are working
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Demographics

• Proportion of early retirements has been
  increasing steadily for 20 years
• 1983 71 of males 55-59 worked
• 1998 51 of males 55-59 worked
• Current economic projections
• do they allow for such rates?
• do they allow for worsening?

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Demographics

• Summary
• Longevity
• Reproduction
• Immigration
• Early retirement
• Conclusion

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Demographics

• Dependency ratio projections

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Italy Europe's biggest age problem

• Introduction
• Demographics
• Economic context
• Pensions reform
• Lessons for other markets?

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Economic context

• Italy's national debt as of GDP
• approximately twice that of all other European
  countries
• mid-1990's 120 cf 60 other countries

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Economic context
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Economic context

• Italy's national debt
• how did it get so big?
• what's it like servicing a national debt of 120
  when interest rates are 15?
• what's it like facing a demographic crisis from
  such a starting position?

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Economic context

• Pension costs

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Italy Europe's biggest age problem

• Introduction
• Demographics
• Economic context
• Pensions reform
• Lessons for other markets?

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Pensions reform

• State pensions system (until recently!)
• pensions from age 60 M, 55 F
• benefit accrual x average of last 10 yrs'
  remuneration
• earnings revalued by cost of living 1
• accrual rate 2
• maximum of 80
• plus benefits for spouses and orphans

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Pensions reform

• Interesting formula high national debt
  demographic crisis highly generous pension
  system un grandissimo problema
• Conclusion reduce cost of pensions

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Pensions reform

• Modifications to pension system
• notional defined contribution basis
• increase in retirement age
• increase in contributions (ie tax)
• enabling new private pension vehicles
• tax incentivisation for private pensions

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Pensions reform

• Notional defined contribution basis
• notional contribution 33 salary
• roll-up at RPI allowance for GDP growth
• apply annuity factor at retirement

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Pensions reform

• New defined contribution basis in action
• years contributing - 40
• GDP growth - assume salary growth
• annuity rate at age 65 6.136
• Result
• 33 contribution rate applied to each year's
  earnings, adjusted for GDP growth, x annuity
  factor
• 33 x 40 x 0.06136 81 of last yr's earnings

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Pensions reform

• New system still very generous
• Market research showed an average of only 8 of
  respondents had any intention of going for
  private pension provision

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Pensions reform

• Enabling of new private pension vehicles
• industry funds (fondi chiusi, closed funds)
• for large companies (FIAT) or national trade
  associations eg rubber plastic workers
• open funds (fondi aperti)
• for anyone not able to join fondo chiuso
• private pension life insurance policies (PIPs)

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Pensions reform

• Problems with private pension vehicles
• industry funds (fondi chiusi, closed funds)
• lengthy authorisation procedure
• no reason to popularise
• open funds (fondi aperti)
• lengthy authorisation procedure
• discrimination against - closed funds take
  priority
• private pension life insurance policies (PIPs)
• from 2001

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Pensions reform

• Problems with private pension vehicles
• tax bottleneck - premiums against tax only up to
  2 x amount of TFR contributions earmarked for
  pension fund - but political impasse on TFR
• small tax incentive
• 11 roll-up instead of 12.5
• premiums tax-free but equivalent tax incurred at
  vesting
• constraints on getting money back out

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Pensions reform

• Problems with private pensions market
• Open funds as at 30 Sep 2001
• total of 72
• Only 6 with more than 10,000 members
• median size around 1,000 members
• average fund size 1,600 / member

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Pensions reform

• Problems with private pensions market
• Closed funds
• PIP life insurance pensions policies

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Italy Europe's biggest age problem

• Introduction
• Demographics
• Economic context
• Pensions reform
• Lessons for other markets?

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Italy Europe's biggest age problem

• Lessons for other markets?
• public awareness
• presentation of cuts to State pension
• extent of cuts
• size of tax advantage for private pensions
• ease of authorisation for pension funds
• healthcare?

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Italy Europe's biggest age problem

• "Le donne italiane devono fare più bambini"
  Italian finance minister, 2001

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ITALY Europe's biggestage problemMatthew
EdwardsWatson Wyatt