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UNICREDITO ITALIANO

UNICREDITO ITALIANO. Alessandro Profumo - CEO. UBM 3 rd ITALIAN CONFERENCE - FINANCIAL SECTOR. “PENSION REFORM: A GROWTH DRIVER FOR THE FUTURE?”. Milan - November 8 th , 2001. PENSION REFORM: A GROWTH DRIVER IN THE FUTURE ?.

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UNICREDITO ITALIANO

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  1. UNICREDITO ITALIANO Alessandro Profumo - CEO UBM 3rd ITALIAN CONFERENCE - FINANCIAL SECTOR “PENSION REFORM: A GROWTH DRIVER FOR THE FUTURE?” Milan - November 8th, 2001

  2. PENSION REFORM: A GROWTH DRIVER IN THE FUTURE ? Government has given up important direct responsibilities in assuring high living standards to retirees. Now households need to review the way they allocate their savings Financial institutions have a fundamental role and a responsibility in this process. This responsibility has become even greater now, as investment opportunities enter a more difficult term Given that, can pension reform become a growth opportunity for Italian banks and insurance companies ?

  3. Agenda Structural impacts of the Italian Pension Reform Perspectives for the Italian pension fund industry UCI’s integrated approach to the pension business Conclusions

  4. IN THE LAST DECADE PERSPECTIVE PENSION BURDEN ON PUBLIC FINANCES FORCED STATES TO REDUCE THEIR GENEROSITY Projected public spending as percentage of GDP 25 20 15 % of GDP 10 5 0 1995 2000 2010 2020 2030 2040 2050 2060 2070 Italy Germany France Japan Canada USA United Kingdom Source: OECD The “ageing population” forced most governments to progressively reduce the benefits paid out for public pensions making the case for households to divert a larger sum of their earnings for precautionary purposes

  5. MAJOR CHANGES INTRODUCED IN ITALY BY THE AMATO AND DINI REFORMS... Years of contribution for eligibility Seniority Pensions: Min. years of contribution for eligibility Retirement Age Pension wages PRE 1992 Private employees Public employees Self employed 60 men, 55 women 65 65 men, 55 women 35 20 men, 15 women 35 Last 5 yrs average salary Last month’s salary Last 10 yrs average income 15 AMATO REFORM - 1992 Private employees & Self employed Public employees 65 men, 60 women 65 20 20 Average of whole working life earnings, re-evaluated at 1% annually Increasing for public employees DINI REFORM - 1995 Pension wages calculated using a contributions based model 57-65 5 - Young workers 57 years of age and 35 years of contribution or 40 years of contribution Pension wages calculated using a mixed life earnings /contributions model Middle Age workers (less than 18 years of contribution) 20 65 men, 60 women Pension wages calculated using a life earnings related method 57 years of age and 35 years of contribution or 40 years of contribution Older workers (more than 18 years of contribution) 20 65 men, 60 women Source: OECD

  6. ... OPENED THE WAY FOR PRIVATE MARKETS… PENSION REFORM DEBATE WENT ALONG WITH THE DEFINITION OF THREE PILLARS I Pillar - PUBLIC PENSION: generally financed on a pay-as-you-go basis and compulsory II Pillar - OCCUPATIONAL PENSIONS: pensions generally set up by employers or a trade union and mostly administered by private institutions III Pillar: PERSONAL SAVINGS AND RETIREMENT PLANS: set on an individual and voluntary basis, fully funded

  7. …AND MADE THE CASE FOR MORE PRECAUTIONARY SAVINGS IN ITALY THE ADJUSTMENTS INTRODUCED TO THE FORMER PAY-AS-YOU-GO SYSTEM WITH THE AMATO (1992) AND DINI (1995) REFORMS HAS OPENED UP THREE MAIN ISSUES: Social security gap in the case of younger cohorts Retirement gap for middle and high-income households Loss of purchasing power of older retirees compared to younger retirees due to the fact that pension benefits are not indexed to GDP growth (like contributions), but to the sole cost of living

  8. SOCIAL SECURITY GAP: YOUNG COHORTS VERSUS OLD COHORTS SOCIAL SECURITY GAP: YOUNGER COHORTS RECEIVE A MUCH LOWER PUBLIC PENSION BENEFIT RELATIVE TO THEIR FINAL PAY YEAR OF BIRTH 50 1942 1952 40 PERCENTAGE GAP BETWEEN PAY AND PENSION BENEFITS 1962 1972 30 1982 YEARS OF CONTRIBUTION 20 35 36 37 38 39 40 Source: E. Fornero, “L’Economia dei Fondi Pensione”, 1999 Younger cohorts show a larger social security gap compared to older cohorts. The shorter the contribution period, the larger the disadvantage

  9. RETIREMENT GAP: LOW INCOME VERSUS MIDDLE AND HIGH INCOME HOUSEHOLDS EMPLOYEES 80 70 • Current Pillar II schemes are far from succeeding in closing the gap between last pay and retirement income in the case of middle and high-income individuals 60 50 RETIREMENT GAP % 40 30 20 10 AGE OF RETIREMENT 0 57 58 59 60 61 62 63 64 65 AVERAGE YEARLY INCOME 30.000 Euro 60.000 Euro 100.000 Euro SELF-EMPLOYED WORKERS 80 70 • Self-employed workers more penalised than employees 60 50 RETIREMENT GAP % 40 30 20 10 AGE OF RETIREMENT 0 57 58 59 60 61 62 63 64 65 AVERAGE YEARLY INCOME Source: PGAM Research 30.000 Euro 60.000 Euro 100.000 Euro

  10. PURCHASING POWER AND PENSIONS INDEXED TO THE COST OF LIVING PENSIONS INDEXED TO INFLATION IMPLY A SUBSTANTIAL LOSS IN PURCHASING POWER OF OLD VS NEW RETIREES, WHOSE BENEFITS ARE BASED ON NOMINAL WAGES 120 100 80 PURCHASING POWER EROSION FOR NEW RETIREES % 60 KEY ASSUMPTION: 40 • Yearly real wage growth: 2% 20 YEARS OF RETIREMENT 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Source: PGAM Research Pensions indexed to inflation (and not to real wages) imply that the farthest in time the retirement date, the larger the gap with new retirees. According to our simulation models, assuming a real wage growth of 2%, an individual who retired 10 years ago would receive a benefit 16% lower than a new retiree with the same final wage and years of contributions. The gap widens to 38% in the case of an individual who retired 25 years ago

  11. PENSION FUND INDUSTRY IS STILL IN ITS INFANCY IN ITALY PENSION FUNDS AS PERCENTAGE OF GDP 100 80 60 % 40 20 0 USA Netherlands UK Canada Japan France Germany Italy • The Pension Funds industry is still at its infancy in Italy, representing just 1.1% of total household financial assets (11% including life insurance schemes) and just 3% of GDP in 2000 • The picture contrasts sharply with that of more developed capital and savings markets like USA, UK and the Netherlands where pension funds already represent over 80%of GDP

  12. Agenda Structural impacts of the Italian Pension Reform Perspectives for the Italian pension fund industry UCI’s integrated approach to the pension business Conclusions

  13. IN THE LAST FOUR YEARS PENSION PRODUCTS DID NOT FULLY BENEFIT FROM THE STRONG GROWTH OF TOTAL FINANCIAL ASSETS IN ITALY ... 1996 Households’ total financial assets: Euro 1,878 bn 2000 Households’ total financial assets: Euro 2,602 bn Other: 2% Other: 3% Deposits: 25% Life/Pensions: 11% Deposits: 30% Life/Pensions: 10% Equities: 22% Bonds: 30% Mutual Funds: 5% Equities: 25% Bonds: 19% Mutual Funds: 18% CAGR 1996-2000 Source: Bank of Italy +8.5% • Italian savings market witnessed an unprecedented growth in the past 4 years (CAGR 8.5%). The development of capital markets went hand in hand with households progressively reducing their risk aversion, as shown by the rise of the portion of assets diverted to mutual funds and shares • Pension funds could scarcely benefit from this growth, mainly due to legal uncertainties and lack of products

  14. …BUT ARE SET TO EXPAND RAPIDLY IN THE NEXT 20 YEARS ... HOUSEHOLD FINANCIAL ASSET MIX IN 2000 AND 2020E 2020E 12% 15% 25% 48% 2000 18% 10% 71% 1% Euro bn 0 2,000 4,000 6,000 8,000 Mutual Funds Life Insurance Pensions Funds Other assets Source: PGAM Research • Even if Italian households are likely to keep a more cautious view on financial markets, in 20 years we believe they will likely tend to show an asset mix closer to those markets where the pension fund industry is already a reality (USA, UK, The Netherlands) • Our models suggest that pensions funds will account for at least 25% of total financial assets from the current 1.1% and pension funds+life insurance will grow from the current 11% to 40%

  15. … AND TO BECOME ONE OF THE FASTEST GROWING ASSET CLASSES PENSION FUND INDUSTRY SET TO GROW STRONGLY IN THE NEXT 20 YEARS Euro bn 2,500 CAGR 2001-2020 2,000 +23.5% 1,500 1,000 500 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: PGAM Research • UCI estimates that the Italian pension fund market will total Euro 2,000 bn in 2020 (Euro 3,200 bn considering also life insurance). This would imply a 2001-2020 CAGR of 23.5% for the pension fund industry (13% CAGR taking into account also life insurance) • This will be due to the diversion of a larger portion of savings to pension funds and life insurance products and to a partial switch of assets from other investment categories

  16. 230 210 190 170 150 130 110 90 70 50 oct- apr- oct- apr- oct- apr- oct- apr- oct- apr- oct- apr- oct- apr- oct- apr- oct- apr- oct- 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 THE UPWARD TREND OF VOLATILITY... EQUITY AND BOND MARKETS IMPLICIT VOLATILITY TRENDS IN THE LAST 10 YEARS S&P500 Implicit Cluster Volatility Re-based JP Morgan Global Bonds Implicit Cluster Volatility Re-based BASE 19.10.1992=100 Source: UBM Research on Datastream data Huge increase in volatility mainly due to: • Higher households’ risk propensity • The “Internet bubble” • Quick diffusion of derivatives

  17. 200 180 160 140 120 100 80 jul-98 jul-99 jul-00 jul-01 oct-98 oct-99 oct-00 oct-01 jan-98 jan-00 jan-01 jan-99 apr-98 apr-99 apr-01 apr-00 Dax index S&P composite Milan Comit ... AND THE RECENT FINANCIAL MARKETS TURMOIL MADE IT CLEAR THAT INVESTING IN PURE EQUITY PRODUCTS IS NOT SAFE FOR PENSION PURPOSES Lucky retirees Unlucky retirees EQUITY MARKETS PERFORMANCE COULD IT HAPPEN AGAIN? Long-term financial market growth estimates have been cut by the majority of analysts and strategists Source: Datastream SHIFTING OF HOUSEHOLD SAVINGS INTO A LONG-TERM PERSPECTIVE BECOMES A MUST

  18. INCREASED RISK AND RISK AVERSION REQUIRE PROFESSIONAL SERVICES HOUSEHOLDS WILL ASK MORE THAN IN THE PAST FOR PROFESSIONAL “ADVICE” ESPECIALLY IN THE CASE OF LONG TERM INVESTMENTS • The economic outlook and the recent political developments could seriously affect the financial markets in the short and medium term • Increased risk and risk aversion, due to higher volatility and divergent trends across the various categories of financial assets, make a professional approach to financial markets more relevant than in the past THIS IS THE NEW CHALLENGE AND OPPORTUNITY FOR FINANCIAL INSTITUTIONS • Household needs for professional advice, sophisticated products and ALM techniques are even more urgent when long term investments are aimed at guaranteeing an appropriate standard of living after retirement

  19. Agenda Structural impacts of the Italian Pension Reform Perspectives for the Italian pension fund industry UCI’s integrated approach to the pension business Conclusions

  20. UCI’S PATH TO DELIVERING LONG TERM RESULTS IS CONSISTENT WITH THE EXPECTATIONS FOR RETIREMENT SAVINGS IN THE NEW PENSION FUND MARKET UCI WILL LEVERAGE ON THESE THREE PILLARS: • a strong and disciplined Asset Management Factory • the investment bank’s ability to provide innovative risk protection • a widespread efficient distribution network Proven long term results, based on sound investment process and active management 2,924 branches to serve more than 6.5 mln customers Risk Management culture

  21. PIONEER: EXCELLENT LONG TERM RESULTS THROUGH A CONSISTENT APPROACH... • ACTIVE MANAGEMENT ... Active management can better identify those assets with above average growth potential on a medium-to-long term basis ... THANKS TO A FACTORY BUILD UP TO SUPPORT OUR STRATEGY • 32 Analysts • 61 Portfolio Managers • 25 Quantitative Researchers • 3 Global Research Hubs: Boston, Dublin, Milan • BOTTOM-UP RESEARCH ... Stock picking based on bottom-up research and fundamental analysis has proved to be winning in the long term

  22. ... AS DEMONSTRATED BY OUR US FLAGSHIP FUND PERFORMANCE PIONEER FUND PERFORMANCE$10,000 initial investment on 3/1/28 (POP Class A Shares Only) Pioneer Fund Class A Shares Pioneer Fund$76,644,617 Net Asset Value Public Offer Price* S&P 500 S&P 500 $13,367,889 5 YEARS 3 YEARS 1 YEAR +15.6% +14.3% +13.3% +10.1% +8.0% +7.1% -16.8% -21.6% -24.3% Assumptions: Investment period: 1/3/28 (Fund inception 13/2/28) through 31/8/01. $10,000 initial investments in Pioneer Fund and the S&P 500. $10,000 3/78 3/88 8/01 3/28 3/38 3/48 3/58 3/68 *Reflects deduction of the maximum sales charge of 5.75% and assumes reinvestment of all distributions at net asset value. Reflects Class A Share performance. Sources: Towers Data.

  23. UBM & TRADINGLAB: ENGINEERING RISK PROTECTED EQUITY&FUND LINKED PRODUCTS ... • FIRST STEP: fund and equity linked notes with capital protection • SECOND STEP: capital guaranteed segregated accounts and life products PRODUCT RANGE ONE COMMON CONCEPT Base 108 • Freedom for the asset manager; equity up to 60% of total capital invested Valore Più Cap. Premium Linea Protetta • Low capital absorption (according to B.I. standards) Spinnaker UniStar All Banks ADVANTAGES FOR THE WHOLESALER: • Higher equity content of AUM • Higher market market share in wealth management

  24. ... THAT HAVE PROVEN TO BE CLEARLY SUCCESSFUL IN A RISKIER SCENARIO ITALIAN BANKING + + (Euro mln) CAPITAL GUARANTEED PRODUCTS: EURO 4.87 bn CUMULATED NET INFLOWS AS OF 31.10.2001 406.9 1,400 1,200 15.9 1,000 298.5 800 600 990.9 381.0 250.6 464.7 197.3 400 774.1 236.0 200 260.4 213.6 208.0 171.9 0 MAR 2001 OCT. 2001 MAY 2001 JUNE 2001 JULY 2001 AUG. 2001 SEPT. 2001 Fund Indexed Notes SegregatedAccounts Unit Linked

  25. OUR DISTRIBUTION EFFECTIVENESS IS CONFIRMED BY INCREASING MARKET SHARES IN BANCASSURANCE UCI New Production UCI Insurance Portfolio Market Share % Market Share % Market Share % Dec. 2000 Sept. 2001 Jan.-Sept. 2001 (Euro mln) UNIT LINKED 6,006 21.2% 8,962 22.8% 2,956 27.2% INDEX LINKED 207 0.7% 207 0.6% - N.m. PURE LIFE POLICIES 516 0.4% 540 0.4% 24 0.4% TOTAL 6,729 9,709 2,980 3.8% 4.9% 12.6% Source: UCI accounting and IAMA

  26. IN 1H2001 UCI HAS SHOWN A CLEAR LEADERSHIP IN UNIT-LINKED AND TOTAL LIFE PREMIUMS NEW PRODUCTION NEW PRODUCTION: UCI’s PREMIUMS WRITTEN MARKET SHARE (AS AT JUNE 2001) Total Life Insurance Market 12.3% 7.7% 6.7% 6.6% 5.9% 4.4% 3.7% 3.4% 3.2% 2.7% 2.5% 2.1% Assiba Carivita Bnl Vita Alleanza Cattolica Poste Vita Roma Vita Mediolanum Cisalpina Prev. Mpvita - Growlife Creditras - CU vita Sanpaolo vita - life Unit-Linked 25.7% 9.1% 4.9% 4.5% 4.0% 2.6% 2.8% 1.9% 1.5% 2.0% 1.0% 0% Assiba Carivita Bnl Vita Alleanza Cattolica Poste Vita Roma Vita Mediolanum Cisalpina Prev. Mpvita - Growlife Creditras - CU vita Sanpaolo vita - life Source: IAMA

  27. “NEW GENERATION” PENSION PRODUCTS REQUIRE A MORE FOCUSED AND DISTINCTIVE DISTRIBUTION MODEL PERSONAL FINANCIAL PLANNING PFP approach redesign: new philosophy, new mechanism for performance measurement, new targets CUSTOMER SEGMENTATION COMMUNICATION New communication models:communication models currently used in Italy are clearly inefficient New variables (besides wealth and income) becoming more and more important NEW PENSION PRODUCTS DISTRIBUTION MODEL

  28. PERSONAL FINANCIAL PLANNING REDESIGN • From pure risk-profile analysis to focus on multiple variables (i.e. level of employment and of contributions paid to State-based pension programs) Customer Segmentation • Fiscal optimisation becoming not only a target, but also a key driver for product selection Fiscal Optimisation • From simulation based on time series to multi-stage statistical models, taking into account different financial market scenarios Wealth-trend Simulation • Capital Guaranteed and Life Insurance products becoming a key pillar for an efficient asset allocation Product Selection • Individual social security and retirement gaps measurement • Deep analysis of customers’ attitude towards “innovative” products (like “defined contribution” or capital guaranteed products) Customer Understanding

  29. TRADITIONAL CUSTOMER SEGMENTATION IS NO LONGER ANSWERING FROM TO • Age • Age • Number of years for “pension savings” before retirement • Wealth • Wealth • Assets available to cover the social security gap • Saving potential for pension products; possible fiscal benefits • Income • Income • Investment Attitude • Investment Attitude • Individuation of the asset allocation profile • Current type and level of employment • Coverage of the current living standards by State-based pension programs; growth potential of current income • Contributions paid to State-based pension programs • State-pension rights matured and to be matured • Family/Marital status • Benefits to be reverted in case of death

  30. Agenda Structural impacts of the Italian Pension Reform Perspectives for the Italian pension fund industry UCI’s integrated approach to the pension business Conclusions

  31. WE THINK THAT PENSION REFORM WILL BECOME A GROWTH DRIVER IN THE FUTURE FOR THOSE INSTITUTIONS BEST EQUIPPED TO ATTRACT PENSION INVESTMENTS The recent changes in the Italian pension system will force people to shift a large part of their savings to pension purposes, in order to fill social security and retirement gaps and to preserve the purchasing power of their pensions Only financial institutions with strong financial engineering skills and higher understanding of households’ pension needs will be successful in exploiting the challenge of the new market UniCredito is at the forefront in addressing this new challenge

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