Study critical of high Italian pension costs

ITALY - The Italian pension market is split between cost-effective occupational pension funds and individual insurance schemes with higher charges, a new study says.

The study, published by Italy’s Center for Research on Pensions and Welfare Policies, CeRP, found individual schemes were “‘burdened by significantly higher charges”.

The report, “A comparative analysis of the costs of Italian individual pensions plans” highlights a ‘dichotomy’ between the competitive second pillar and the costly third pillar. It was prepared by Elsa Fornero of the University of Turin and CeRP’s Carolina Fugazza and Giacomo Ponzetto

According to the study, the costs incurred in the accumulation phase for the second pillar’s open pension funds are more or less in line with products sold in highly developed financial markets like the US.

“Italian pension funds with the lowest management costs can stand to comparison even with second-pillar pensions, both in Italy and other countries, with annual charges limited to 60-70 basis points,” the authors say.

But third-pillar pension insurance policies, or PIPs, generally offered by insurance companies have “rather variable but usually high costs”.

The average annual charge for PIPS is of 2.4% and as a result, the study points out that over a long period, up to half of the theoretically attainable amount could be absorbed by management costs, compared with 30% for open pension funds.

The reports also says that the cost of PIPS, although partly explained by the amount of risks undertaken by insurance companies, are higher than both those of other pension plans, in Italy and abroad, and those advocated by researchers and regulators.

“There seems to be scope for improvements in the level of cost-efficiency of Italian individual pension plans,” the report concludes.

In 2003, pension regulator Covip stressed that while the annual costs of PIPs ranged from 1.9% to 8.4%, occupational funds, at 0.5% a year, were ‘ showing a clear decreasing tendency’. Covip is currently engaged in tackling the issue high costs associated with PIP funds, an official told IPE.

Open pension funds, offered by banks and asset managers, cost between 1.2% and 1.8%.

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