Italian Pension Funds – update 2021

The Italian Pension System is structured around three main pillars: public pension, pension funds based mainly on the defined contribution schemes which can be either collective or individual.

COVIP, the Italian Pension Funds Supervisory Authority, publishes a yearly report on the state of the system. This article explores the main findings in the 2021 report, thus providing an overview on the “health condition” of the Italian private pension funds system as of last year-end.

2021 was a positive year overall, both from the participation and financial points of view. At the end of 2021 there were 349 pension funds (372 at the end of 2020) with a total of more than 8.7 million members (+3,9% from the previous year), around 35% of the total workforce. The contributions received by pension funds were approximately 17.6 billion euro, with 42% from the inflow of TFR payments (severance indemnity). Both the membership and contribution rates of increase returned to pre-pandemic levels, as a confirmation to the system’s resilience.

The demographic composition of members was similar to the previous years. Women amount to 38,2% of total membership, with a slight growth of only +0,5% over the last five years. These proportions are observed in all age groups. The bulk of total members (50,3%) belongs to the “central” age bracket (from 35 to 54 years) while 31,9% of members are over 55 years old. The predominance of older members also explains the preference for less risky profiles, especially those who offer an assurance on contributions (39,5%); riskier ones, such as equity funds represent the 8,7%. These data confirm consolidated tendencies observed in previous years.

Total resources available for retirement provisions amounted to 213 billion euro at the end of the year with a +7,8% over 2020; total assets directly held by pension funds amounted to 176 billion, with 65 billion held by contractual pension funds and 67,7 billion held by pre-existing pension funds. Total outflows were 11,4 billion euro, mainly in the form of pension benefits (around 6 billion).

As for asset allocation, pension funds invested 53,7% (-1,8% compared to the previous year) of their resources in debt securities: 16,8% in Italian bonds, 18,7% in foreign government bonds and 18,2% in corporate bonds. Equity investments rose from 19,6% to 22,6%, while investments in fund shares remained steady at around 16%; real estate investments were residual, amounting to 1,9% of total assets. Finally, pension funds domestic investments were around 40 billion euros or 22,7% of total assets.

The positive trend of the pension funds’ system in 2021 was also favoured by the advantageous conditions of financial markets during the year; compared to other less risky options, equity sub-funds performed better. However, different pension schemes also offered different net returns:

  • Contracted out pension funds experienced an average 4,9% return; on a 10-year horizon, the average return was 4,1%.
  • Open pension funds’ average return was 6,4%; on the longer period, 4,6%.
  • For the “new” PIPs (individual pension plans), the returns of unit-linked products were on average 11% (5% on a 10-year horizon) while those with-profit, which are valued at historical cost, were 1.3% (2.2%).

For comparison, TFR revaluation (linked to the CPI index) was 3,6% last year and 1,9% for a 10-year period. Overall, total returns among different pension schemes in 2021 were superior to 2020, thanks to the improvement of markets.

These differences in performance were also influenced by different total costs associated to each pension plan. With a 10-year holding period, the average Synthetic Cost Indicator (SCI)[1] is 0,45% for contracted out pension funds, representing the most affordable and convenient solution; open funds average SCI is 1,36% while that of PIPs is 2,18%.

COVIP paid attention to the pension funds’ governance following the introduction of the so-called “key functions” (such as the risk management function and the actuarial function), and to the transparency, according to the IORP2 Directive. The next steps will concern the introduction of ESG criteria in pension funds investment policies; at present, only 30% of pension schemes include these criteria in their investment process.

[1]The SCI indicator is calculated through a standardized methodology set by COVIP.