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

1. ITALY: Europe's biggestage problemMatthew EdwardsWatson Wyatt

2. Introduction Demographics Economic context Pensions reform Lessons for other markets? Italy: Europe's biggest age problem

3. Summary Longevity Reproduction Immigration Early retirement Conclusion Demographics

4. Italian population 2000 Demographics

5. Italian population 2030 Demographics

6. Italian population projection 2000-2050 Demographics

7. 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 Demographics

8. Longevity has increased continues to improve similar to other OECD countries Demographics

9. Summary Longevity Reproduction Immigration Early retirement Conclusion Demographics

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

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

13. Summary Longevity Reproduction Immigration Early retirement Conclusion Demographics

14. Summary Longevity Reproduction Immigration Early retirement Conclusion Demographics

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

16. Proportion of males aged 55-59 who are working

17. 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? Demographics

18. Summary Longevity Reproduction Immigration Early retirement Conclusion Demographics

19. Dependency ratio projections Demographics

20. Introduction Demographics Economic context Pensions reform Lessons for other markets? Italy: Europe's biggest age problem

21. Italy's national debt as % of GDP approximately twice that of all other European countries mid-1990's: 120% cf 60% other countries Economic context

22. Economic context

23. 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? Economic context

24. Pension costs Economic context

25. Introduction Demographics Economic context Pensions reform Lessons for other markets? Italy: Europe's biggest age problem

26. 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 Pensions reform

27. Interesting formulahigh national debt + demographic crisis + highly generous pension system = un grandissimo problema Conclusion: reduce cost of pensions Pensions reform

28. 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 Pensions reform

29. Notional defined contribution basis notional contribution 33% salary roll-up at RPI + allowance for GDP growth apply annuity factor at retirement Pensions reform

30. 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 Pensions reform

31. New system still very generous Market research showed an average of only 8% of respondents had any intention of going for private pension provision Pensions reform

32. 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) Pensions reform

33. 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 Pensions reform

34. 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 Pensions reform

35. 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 Pensions reform

36. Problems with private pensions market Closed funds PIP life insurance pensions policies Pensions reform

37. Introduction Demographics Economic context Pensions reform Lessons for other markets? Italy: Europe's biggest age problem

38. 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? Italy: Europe's biggest age problem

39. "Le donne italiane devono fare più bambini"Italian finance minister, 2001 Italy: Europe's biggest age problem

40. ITALY: Europe's biggestage problemMatthew EdwardsWatson Wyatt