Asset Management trends and practices for Pension Funds. Fondo Pensione Fondenergia: the experience of an Italian Occupational Fund

Transcription

1 Asset Management trends and practices for Pension Funds Fondo Pensione Fondenergia: the experience of an Italian Occupational Fund Athens - 24th October 2017 Alessandro Stori 1

2 Contents Italian Pension Funds system Fondenergia in the Italian Pension Fund Industry Investment principles Strategic Asset Allocation Risk management 2

3 Italian Pension system: three-pillars First pillar: public, compulsory and unfunded pay-as-you-go system (PAYG) mostly managed by the State but also by Liberal Professions; Second pillar: private, voluntary and funded system. 36 industry-wide pension funds characterized by defined contribution schemes have been established since the late 90 s. They are jointly managed by representatives of employers and employees. Fondenergia is one of them; Third-pillar protection used to be an optional, individual pension plan. However, since 2007 it has been converted into second pillar protection and, under certain conditions, can receive employers contributions. 3

4 UNFUNDED First Pillar All employed and self-employed people in Italy must contribute to the first pillar pension system. The state pension provides for 100% of the registered employed population in Italy; Contributions are among the highest in Europe and amount to almost 33% of gross salary; The current salary replacement rate provided by the first pillar is around 63%. Such a high rate will be attainable only after a complete 42 years career and will be reduced 2 pp for every year of unemployment; Public First Pillar Pensions represent a State liability and no assets are set aside to fund them. Since the beginning of 2012 the total amount of first pillar pension payments has been stabilized at 16% of GDP. 4

5 First pillar: 84 years of history 3 different periods «MODERN STATE» I.N.P.S (National Institute of Social Insurance) was established in 1933; «GOLD RUSH» in 1969 the Pension Benefits were extended and minimum contribution requirements entirely removed. In the late 70s pubblic officers were allowed to retire after less than 20 years of work (19 y + 6 m + 1 d); «NEVER ENDING STORY + FINAL ARMAGEDDON» 9 REFORMS IN 20 YEARS (Amato in 1992, Dini in 1995, Prodi in 1997, Maroni in 2007, Prodi&Damiano in 2008, Sacconi&Brunetta in 2010, Tremonti in 2011 e Monti&Fornero in 2011, have shaped the present Italian Pension System. 5

6 FUNDED Second Pillar There are four types of second-pillar pensions in the Italian pension framework(*) N. 294 pre-existing funds employer-run superannuation schemes that pre-existed mid-nineties pension legislation. Most of them are closed to new members (NAV 57.5 bln); N. 36 contractual or Industry-wide sector funds that are organised by company, industry or geographical sector and are run jointly by employers and employee representatives ( 46 bln); N.43 open funds - managed by banks or insurance companies and open to the employed and the self-employed. ( 17.2bln); N. 78 personal pension plans - managed by insurance companies and distributed mainly by insurance agents and IFAs. ( 23.7 bln); Italian second-pillar pension funds have 7.4 million members participation rate is around 29% (*) Report Investitori Previdenziali Centro studi Itinerari Previdenziali 6

7 Second Pillar at a glance(*) Funds Members NAV contributions N N yoy % increase bln yoy % increase bln yoy % increase Industry - wide PF s 36 2,597, Pre - existing PF s (company schemes) Open PF s (Insurance&Banks) Personal pension plans (Insurances) , ,258, ,869, Total 452 7,416, *source Covip 2016 data 7

8 The Italian Occupational Pension Funds system Italian Industry-wide Pension Funds (36 sector funds) * 2.6 million members 46 billion euros NAV 29% participation rate AVG total contributions: from 6 % to 13% of gross salary 2016 total contribution inflows: gross = 4.7 bln; net = 3.4 bln Assets growth rate (CAGR last 10 y) = 23.5 % *source Covip 2016 data 8

9 Fondo Pensione Fondenergia Oil and Gas Industry pension Fund Italy (Chemical and water workers and employees can also join the fund) Defined contribution (DC) plan for 42,300 workers and employees; (213 employers) - 85% participation rate (the highest in the industry) 2.14 bn euros assets at 09/2017; 205 mln gross contribution expected in 2017; AVG individual contribution = above 11% of gross salary ; A life-cycle approach with 3 different investment lines 9

10 Fondenergia s individual contribution levels: percentage of annual gross salary Contract Type = Oil sector Chemical sector Gas & Water TFR (worker/employee) 6,91 6,91 6,91 worker/employee 2,00 1,46 1 (*) employer 2,65 (*) 2,31 1,55 (*) total 11,56 10,68 9,46 (*) from 1/

11 Fondenergia s organizational structure INSURANCE COMPANIES ADMINISTRATION SERVICES UNIPOLSAI e GENERALI: ANNUITIES UNIPOLSAI: INVALIDITY & DEATH EMPLOYEES EMPLOYERS DEPOSITARY BANK SUPERVISORY BODIES REGULATOR (COVIP)) AUDITORS (BDO) INTERNAL CONTROL (ELLEGI) ASSET MANAGERS GARANTITO PIONEER BILANCIATO PIONEER HSBC ROTSCHILD ANIMA PIMCO DEUTSCHE BANK EURIZON BNP PARIBAS STATE STREET DINAMICO CANDRIAM CREDIT SUISSE STATE STREET 11

12 Garantito Investment line SAA Equity 5% Bonds 95% Listed Equity Europe; 5% Money market; 10% Corporate Bonds Emu 1-3y; 20% Gov Bonds Emu IG 1-3y; 55% 12

13 Bilanciato Investment line SAA Equity 30% Bonds 70% Equity (N.America); 6% Equity Emerging World; 3% Cash; 6% Equity Europe; 21% Gov Bonds Emu; 20% EM Gov Bonds; 2% Gov bonds US; 10% Corporate Bonds HY; 3% Corporate Bonds Global; 13% Inflation linked EMU bonds; 17% 13

14 Dinamico Investment line SAA Equity 50% Bonds 50% Equity (N.America); 12% Cash; 3% Gov Bonds Emu; 16% Equity Europe; 33% Gov bonds US; 5% Inflation linked bonds; 10% Corporate Bonds HY; 3% Corporate Bonds Global; 13% 14

15 Investment lines Statistics - 09/2017 Investment lines ====> CAPITAL GUARANTEED BALANCED DYNAMIC Bonds/Equity 95/5 70/30 50/50 NAV ( mln) Risk (Std 1Y) 0,83% 2,56% 2,87% YTD return 0,77% 2,75% 3,89% 10y return (p.a.) 1,75% 3,70% 3,30% annualized return since inception 1,81% (10yrs) 3,65% (18yrs) 5,10%(14yrs) Members Age (avg) Total expense ratio 0,29% 0,24% 0,20% 15

16 Members age distribution as of 12/2016. Avg BILANCIATO: 48 yrs Avg GARANTITO: 45 yrs Avg DINAMICO: 43 yrs 16

17 Statement of Investment Principles (S.I.P.) Since 2012 the boards of Italian Pension Funds have been required to prepare and review, at least every three years, a specific «Statement on Investment Principles», in accordance with a Covip resolution dated 12/03/2012. The statement must be transmitted to the subjects involved in the Fund s assets management (asset managers, depositary bank, consultants) and published or made available upon request. In the Statement Pension Funds must: identify the Fund s strategic objective; identify the Investment Policy objective; establish/modify the strategic asset allocation (s.a.a.); identify duties and responsabilities of all of the subjects involved; write the risk management framework of the Fund. 17

18 S.I.P. - establishing Fund strategic objective (1) In order to identify the strategic objective of the Fund, the personal data of almost members were analyzed and clustered into 8 different groups (common denominator: gender and contribution level). Then, the retirement age and the first pillar (INPS) replacement rate were estimated for each group. Due to the high number of variables influencing the Italian «pay as you go» First Pillar System, estimating first pillar replacement rate was a very difficult task to perform. The Fund s strategic objective is to reach a global replacement rate of 85% of the last annual gross salary for the highest number of members. «Global replacement rate» means the percentage of pre-retirement income that will be paid out by Italian Social Security (INPS) plus the replacement rate given by Fondenergia s annuity. 18

19 S.I.P. - an example of replacement rates 85% gross final salary replacement rate 100% net final salary replacement rate 19

20 Global replacement rate S.I.P. Likelihood of reaching the target - what level of risk can our participants bear? After having identified the target return, a Montecarlo Analysis was performed to identify the maximum level of standard deviation of each investment line. 120% 100% 80% 60% 40% 20% 0% Age 20

21 S.I.P. Risk tolerance and life-cycle Estimated risk levels in different life-cycle paths for each age class. global replacement rate statistics age years to retirement (time horizon) Lyfe Cicle path best expected case average worst expected case most frequent case 95th percentile 50th percentile 5th percentile (mode) Bilanciato (6 years) + Garantito (last 5 years) 89,10% 87,60% 86,31% 87,67% Dinamico (6 years) + Garantito (last 5 years) 90,43% 87,90% 85,95% 87,25% Bilanciato (17 years) + Garantito (last 5 years) 95,68% 91,52% 88,35% 90,78% Dinamico (17 years) + Garantito (last 5 years) 100,46% 92,95% 87,83% 91,31% Bilanciato (25 years) + Garantito (last 5 years) 89,21% 83,81% 79,74% 84,42% Dinamico (25 years) + Garantito (last 5 years) 96,83% 86,09% 79,38% 85,49% 21

22 Fondenergia s current risk-return targets. Nominal return Real return Annualized STD GARANTITO 0.53% -0.17% 1.10% BILANCIATO 2.70% 1.20% 4.20% DINAMICO 3.43% 1.83% 6.00% 22

23 Fondenergia s asset managers. In the Bilanciato and Dinamico investment lines a Risk Overlay Manager (SSgA) manages the volatility of the equity portfolio. More specifically, he is assigned responsibility for keeping the shortfall under control by dynamically hedging equity risk through derivatives. 23

24 Example of targets, benchmarks, constrains ed incentives Balanced AM bilanciato Balanced AM dinamico Risk Overlay Manager objective r > bmk r > bmk keeping shortfall-risk under control bmk index composite index composite 96% reference portfolio + 4% cash index tracking error -4%<TE<+4% -7%<TE<+7% - 4%< TE T.E.V. < 4% <7% 4%<TEV only if TE<0 Performance fees vs. bmk vs. bmk vs. bmk 24

25 Statement of Investment Principles : tracking long term objectives and results Graph: objectives are represented by dotted lines, results by solid lines 25

26 Statement of investment Principles tracking long term objectives and results 26

27 Thank You for your attention Asset Management trends and practices for Pension Funds Alessandro Stori - Director Fondenergia Pension Fund Italy 27