Bringing life to Italy's post office
Erik Stattin is an unusual occupant of an executive’s chair in the traditional world of Italy’s postal service. But then Posteitaliane is less and less its traditional self with each mail delivery – witness its very successful life assurance operation Postevita, which he runs. Now pensions business is on his agenda.
But Stattin, who is Swedish and a business administration graduate of the Stockholm School of Economics and of Harvard Business School, has strong local credentials, having worked for consultant McKinsey in Italy from 1989–97, where he led the pension fund practice for four years. “Then for a year I was managing director of Skandia Italia Holding, before moving to Postevita at the end of 1998.”
There are two businesses in the postal service, he explains. The first is the mail delivery and all that this entails, the second is the financial services activities, which until two years ago were limited to transfers in a giro-type account, savings accounts and postal bonds. “A product range that had probably remained unchanged for many decades,” he adds. All that has changed, as Posteitaliane restructures under its five-year turnaround plan.
Seeing the rise of bancassurance, Posteitaliane, as part of its new strategy, applied for authorisation in 1997, which it did not obtain until 1999, after the organisation had become a limited liability company and was no longer part of Italy’s public administration. But in stepping into the new life business, the group focused on having the right product design and the delivery through the sales assistants in post offices, but only after they had been appropriately trained.
“The other activities we passed out to various partners,” says Stattin, so IT and administration, and asset management are all outsourced. “But we do the asset liability modelling work.” So the organisation runs with just 15 people and was responsible in 2000 for bringing in E1bn in premiums – this from a standing start in the previous June with a pilot test in a number if post offices. The national roll-out was in October 1999 and by year-end some 1,500 of Italy’s post offices were offering Postevita policies. At the close of 2000, around 6,000 offices were actively distributing policies out of the potential 14,000. “By end of this year we will be reaching 11,000 of these offices, where trained personnel will be distributing our products.”
These financial services people are offering life policies in addition to the traditional accounts and postal bonds, and see their role as guiding customers into the right product to meet their needs. “We only sell through the post offices. And the life policies are sold as the long-term savings over 10 years.”
But Postevita moved cautiously. “With a non-specialised sales outlets, the product offerings were kept simple, first a single premium policy providing a minimum guaranteed return, plus a bonus each year based on bond returns. Then we added an annuity contract, with regular payments and a balanced product investing 50/50 in equities and fixed income. Then last November, we obtained the go-ahead for index-linked structured products, linked to various equity indices, available for a limited period,” he says. “Our aim is transparent, ‘cheap by kilo’ products, in the top decile in cost terms.”
The next step for Postevita will be a move into the fiscally incentivised pensions business, with an individual contract to be launched in autumn. “This will have the same fiscal treatment as a pension fund, with all the advantages and constraints of Italian regulation.” Up to 12% of gross salary can be contributed tax free up to E5,000 each year, but it has to be invested until retirement, with 50% of the value as an annuity. “Our design strategy here is to offer a choice of having the product with or without the fiscal benefits and constraints, with the ‘financial engine’, of the existing policies: the bond-only fund and the balanced 50/50 fund, now and a new pure equity fund.” It is likely to be available with and without some form of guarantees, Stettin adds.
The company is targeting the 12m or so existing customers of the post office’s financial services, with accumulated assets there of a staggering E170bn.
In relation to the fiscally incentivised pension product, the real problem is that the current market is limited, he points out. So an arrangement for employees of private sector companies with TFR provisions, means that if an employer contributes to a pension fund a portion of the TFR provision, for example, when the employer contributes 1% of pay and the employee another 1%, making a total 2% TFR contribution going into the fund, the employee is now able to invest up to another 2% of pay with tax deducted.” Such constraints narrow down considerably the value of the fiscal benefits.
Another category of employees with potential are those who joined the workforce after 1993. Here, the employees can force the employer to put the full TFR, equivalent to 7% of pay, into a pension fund, then double this amount can be contributed on a tax advantaged basis up to 14%, though a blanket overall 12% limit applies. “But if you look at self-employed people, you don’t have a TFR and there is a really excellent opportunity,” says Stattin, with enthusiasm. He sees their target market changing, because the constraints on the market are so complex. “We believe the market will change over time because of these impositions on the workforce”. Around 50% of workers in the private sector have TFR.
So the most promising key targets are the self-employed and publicly employed sector, as they have significant opportunities to deduct tax on contributions “The exercise is to find these people among the post office’s existing customer base, and that is our immediate and most promising target.”
But whether the new product has a tax incentive wrapper or not, the aim is to treat it as pensions savings, he adds. And the job of the local post office representative is to screen the potential customers to see if they can gain from the fiscal benefits or not. The products that won’t have tax advantages are designed to be more flexible to help offset this.
“We don’t know for sure, but our belief is that about two thirds of our customers converted their existing assets into new plans, while a third was new money,” says Stattin. “But 90% of the customers were existing post office connections.” Because the sales force is salaried and not paid commission, there is little risk of mis-selling, he maintains.
So this year with additional offices coming on stream, strong premium growth is forecast, with premium income expected to jump by 50% to E1.5bn. “Last year, in new business terms, we reached the number 11 slot, but this year unofficial figures put us in third place for the first quarter in new business terms.” Certainly, not bad for the new kid on the block.
“The name of the game is to have products that are attractive to customers and are comprehensible. As a life insurance company, you do not start out on a positive note with customers.” So huge effort is directed towards the training of the sales people. “It would be so easy to run through the whole network, obtaining six months’ sales production, then everything would end.” A good measure of success in his view is that the productivity of the local offices does not reduce, but in fact increases over time. “Policy lapses are much lower than we allowed for in our projections.”
As to the prospects for the pensions products, Stattin feels that, with the constraints that they labour under, they will not take off in high volumes initially. “We want to deliver the benefits to those that can avail of them.” Last year the open pension plans offered by the financial sector generally took in Lit75bn (e39m), equivalent to what Postevita sold in three weeks. “It is a market that does not really exist yet.”
He adds: “But there is a huge need for this product. The 1995 pension reform meant that for young people at retirement, they will get in state benefits 60% of average gross salary. In simplistic terms, for someone starting work at 20 and retiring at 60, they will be getting 60% of their salary at age 40. So there is a huge gap to be filled to meet expectations. This market is one that has to take off – so it will be a very important product in time.”
Originally, when looking for a fixed income manager, Postevita started with a long list and interviewed some 15–20 of the major players in Europe and US. “In addition to performance, we considered their strategies and investment approach. We were looking for someone who was willing to invest time in our decision and investment processes.” Credit Suisse was the first manager to be appointed for the fixed income investments.
The company does not use funds, but operates through segregated accounts. “Our approach is total returns, as our customer is not concerned whether we beat the benchmark or not.” The balanced fund however is built on mutual funds, where there are three providers, Royal Sun Alliance, ING and Credit Suisse. The index-linked product, which accounts for 50% of new premiums, is a structured product, which is awarded to a bank through an auction procedure. The new pure equity fund will invest in global equities, as it does not make sense to be restricted just to Europe, Stattin believes. A global equity manager is under selection currently and this could be a multi-manager type arrangement.
Posteitaliane’s next step will be the introduction of mutual funds later this year, but through a sister company to Postevita. If it unlocks investments at the shorter term end of the savings markets as the life operations have done, a new power stalks the Italian financial services arena.