Transcript Pension awareness, enrolment, and auto

Commissione di Vigilanza sui Fondi Pensione
The Role of Financial Education
in the Field of Pensions:
International and Italian Experience
Ambrogio I. Rinaldi
Central director, COVIP
Conference on Financial Education
Sofia, 29 June 2010
Twinning Project BG/07/IB/EC/02
Outline
• The specific challenges for improving financial literacy and
empowering members to take appropriate decisions in the
pensions field
• Limits of financial education in the area of pensions, its
complementarity with other policy tools , and the need for a
consistent policy approach
• International and Italian experience with financial education
and awareness in the field of pensions and with the
connected policy tools (pension design and default options,
information requirements and selling practices, supervision)
Specific nature of pension issues makes financial education
particularly important and challenging…
•
Very long-term
•
Complexity
•
Social relevance
•
large coverage of population
•
pension reforms need to be understood by the public for
political consensus
•
Non-recurrent choice (you cannot learn from your own experience)
•
Retirement environment changing much (you cannot learn from
your parents)
You cannot learn from your own experience...
pensions are different from retail products purchased on a
recurrent basis – including financial products
•
typically the savings put in your pension plan should account
for a substantial part of your wealth
•
....and you should make a comprehensive planning of their
retirement needs since you are young

mistakes made when young will reflect heavily on your
pensions
You cannot learn from your parents...
the retirement environment is changing a lot
•
increased longevity
•
also health and LTC expenses to increase steeply
•
working lives still not adjusting to longevity trend
•
birth rate going down, less workers to sustain retirees
•
public budget stress and decrease in public pensions

Diffusion of DC schemes and risk shifting to individuals

Individual choice and responsibility
Yet pensions are poorly understood...
Lack of financial knowledge/ understanding/ awareness/ capability
specifically related to pensions:
•
of the changing retirement environment – and the trend for
decreasing public pensions
•
of the need to make sound long-term saving plans and to start
saving early
•
of the characteristics of different pension schemes and
products
•
of the importance and level of costs
•
of long-term investment risks
•
of longevity risks
...not only in the general public, but also within trustees /
administrators → governance issues
Role and limits of Financial Education
• behavioural economics highlight the potential of FE in effectively
empowering people to make informed decisions regarding their
pensions
•
Lusardi-(variuos years); Lusardi-Mitchell (2007)
• on the other hand many studies also show the limits of FE and
stress importance of “institutional design” in defining policies in the
field of pensions
•
Thaler- Bernanrtzi (2001): “save more tomorrow”
•
Choi et al. (2002): “the path of least resistence”
•
Mac Farland et al. (2003): “one size does not fit all”
Financial Education complements other policy
instruments...
... with particular reference to DC plans:

design of the pension system and and of individual products in
order to simplify individual choice

Automatic enrolment, default options

limits to the number of investment options

product standardization

Information requirements to plan members and other consumer
protection rules (selling practices, etc.)

effective competition btw. plans

supervision to ensure the implementation of rules and the
functioning of the system
...Automatic enrolment, default options
•
when wisely designed, default options have an informative and
educational value
•
Automatic enrolment: first path-finding experiences at nationwide level (New Zealand, Italy......UK, Ireland to follow.....)
major issues (connected with FE needs):

administration and marketing costs, competition btw. plans

design of default option (who should set it and how)

need to focus FE efforts on issues most relevant in national
context

need for overall consistency of policy
•
e.g. default options should not contradict FE efforts
International experience on pension awareness
and connected issues
OECD
• Pioneering work on pension-related financial education and awareness initiated
in 2003; OECD recommandation on Good practices for financial education related
to private pensions; developed in 2006 by the WPPP, formally approved by the
OECD Council in 2008
• Current work on DC pension plans, investment and default options, pension
projections and ways to inform members on the uncertainty surrounding estimates
(P.Antolìn and others, 2009 and 2010)
IOPS
• Work on information to be delivered to members of DC pension plans (IOPS
Working Paper n.5 by Rinaldi-Giacomel, 2008)
• further work planned
EC
•forthcoming “Green paper” on pensions will highlight the need for increasing
literacy and aawareness inteh field of pensions and the need to mitigate risks
beared by members in the funded, DC-based pension regimes through better plan
design, regulation and supervision
International experience on pension awareness
and connected issues (cont.)
major messages coming from the work of international
organizations:
 the complementarity between the different policy tools
available for managing risks in the context of DC pensions:
• financial education
• appropriate design of products and default options
• regulation (information to members, selling practices)
• supervision
 a consistent policy framework across all the available tools
is needed in order to exploit this complementarity
International experience on pension awareness
and connected issues (cont.)
Some evidence follows on the information to be provided
to members of pension plans in a DC context in different
countries, regarding:
•documents to be delivered or made available
•investment options
•investment portfolio and returns
•costs and fees
•contributions paid
•pension projections
Information documents: availability (shaded areas) and delivery
Country
General description
of the plan
Australia
Specialized
document on
investments
Key developments
features/
Member’s balance
statement
Personalized pension
projection
Delivered annually
Delivered annually
Delivery annually
Delivered 5 yearly to
members > 45 on request to
all members (coming)
Delivered 4 monthly (1)
Delivered annually to
members >30 (1)
Pension fund’s
annual report
Delivered at joining
Austria
Belgium
Delivery annually
Bulgaria
Chile
coming
Costa Rica
Delivered 6 monthly
Hong Kong
Delivered at joining
Delivered 6 monthly
Delivered annually
Hungary
Delivered at joining
Delivered at joining (3)
Delivered annually
Delivered annually to
members <15 years to
retirement and >15 of
membership
OPP
Delivered at joining
Delivered at joining (4)
Delivered annually
Delivered at joining and
annuallyfrom 2008
PPP
Delivered at joining
Delivered 6 monthly
Delivered at joining and
annually
Delivered quarterly
Delivered annually
Delivered annually
Delivered at joining and
annually (5)
Delivered annually
Delivered annually
Ireland
Israel
Delivered at joining
Italy
Delivered at joining
Jamaica
Delivery at joining
Delivered 6 monthly
Delivered annually
Delivery at joining
Kazakhstan
Delivered annually
Kenya
Delivery at joining
Mexico
Delivery at joining (2)
Poland
Delivered at joining
Delivered annually
Delivered annually
Slovakia
Delivered at joining
Delivered 6 monthly
Delivered annually
Delivered 4 monthly
Delivered annually
Spain
Delivered annually
Delivered 6 monthly (1)
Delivered at joining
Turkey
UK
Delivered annually
Delivered annually
Delivered at joining
Delivered annually
OPP
Delivered at joining
Delivered annually
Delivered annually
PPP
Delivered at joining
Delivered annually
Delivered at joining and
annually
Investment options
Country
Australia
Multiple Investment Options
Default Option
Very frequent
Very frequent
Default option: selected features
Austria
No
Belgium
X
Bulgaria
No
No
Required
Required
Life-cycle
Hong Kong
Very frequent
Very frequent
Usually low risk
Hungary
Very frequent
Required from 2009
Life cycle
Ireland
Very frequent
Required
Life cycle required for PPP
Generalized
Required (OPP)
Guaranteed return
Life cycle
Chile
Costa Rica
Israel
Italy
Jamaica
No (OPP) ,
Very frequent (PPP)
Kazakhstan
X
Kenya
X
Mexico
Required, 2 alternatives
Required
Poland
No (PPP)
No (PPP)
Required, 3 alternatives (PPPM)
Required (PPPM)
Life cycle
Slovakia
Very frequent
Reccomended
Life cycle
Turkey
Very frequent
Reccomended
Life-cycle recommended
UK
Very frequent
Required (stakeholder pensions)
Very frequent (OPP)
Life-cycle reccomended
Spain
Investment performance and actual portfolio
Investment performance
Country
Frequency of disclosure of
returns
Required disclosure
of Volatility
Publication of
comparative tables on
the SA web site
Frequency of disclosure of the
actual portfolio
Australia
Annual
Yes
Annual
Austria
Annual
Yes
No
Belgium
Annual
Bulgaria
Daily
Chile
Monthly
Costa Rica
Monthly
Hong Kong
Annual
Hungary
Annual
Yes
Yes
X (return, volatility)
Annual
X(returns)
Monthly
X (volatility) coming
6-Monthly
X
Annual
Annual (OPP), 6 monthly (PPP)
SA website
Annual (OPP) 6 monthly (PPP)
Yes
Quarterly and annually
Yes
Israel
Monthly
Yes
Italy
Annual
Jamaica
Annual
Annual
Kazakhstan
Annual
Annual
Kenya
Monthly
Mexico
Daily
Poland
6 monthly
6-Monthly
Annual
No
Ireland
Spain
Slovakia
Daily
Turkey
Annual
UK
Annual
X (return, volatility)
Annual
X
Yes (VAR)
Yes
Quarterly and annually
(PF and SA website)
Annual
X
Monthly
X (OPP)
Annual
X (volatility)
Daily
Voluntary
Yes
Annual
Costs and fees
Country
Analytical
disclosure of all
costs
Australia
X
Austria
X
Belgium
X
Bulgaria
X
Chile
X
Hong Kong
Hungary
Synthetic cost
indicator (ex ante)
Table fee
comparison on SA
website
Price cap
Limits on fee
structure
X
X
X
X
X
X
X
X
X
X
X
X
X (PPP)
Costa Rica
Ireland
X (PPP)
Israel
X
X
X
Italy
X
X
X
Jamaica
X
Kazakhstan
X
Kenya
X
Mexico
X
Poland
X
Slovakia
X
X
X
Spain
X
X
X
Turkey
X
X (coming)
X
X (PPP)
X (PPP)
UK
X
X
X
X (PPP)
X
X
Contributions
Paid contributions
Unpaid contributions due by the employers
Information provided by
Frequency
Warning system
in place
Activated by
Communication to
Australia
PF
A
x
PF
Members
Austria
PF
A
Belgium
PF
A
PF
Members
PF
A
PF
Available on website
National Social Security Institute
Available on website
PF
Q
Country
Bulgaria
Chile
Notes
Disclosure of unpaid
contributions within 3 M
Unpaid contributions are
checked by the National
Revenue Agency that
collects contributions
x
x
Costa Rica
PF
A
Employer
M
PF
A
Employer
M
PF
6M
x
Employer
M
x
PF
A
x
PF
A
Employer
M
PF
A
PF
Q
Custodian
Q
Mexico
PF
PF
Poland
A
A
PF
A
PF
Available on web-site
PF
A
Custodian
On request
PF
A
Hong Kong
Hungary
Ireland
Israel
PF and Advisors
Members
Supervisory Authority
PPP management company
Members
PF
Trustee
Supervisory Authority
Members
Disclosure of unpaid
contributions within 90 D
Italy
Jamaica
Kazakhstan
Kenya
x
Slovakia
Spain
Turkey
UK
Contributions
Paid contributions
Unpaid contributions due by the employers
Information provided by
Frequency
Warning system
in place
Activated by
Communication to
Australia
PF
A
x
PF
Members
Austria
PF
A
Belgium
PF
A
PF
Members
PF
A
PF
Available on website
National Social Security Institute
Available on website
PF
Q
Country
Bulgaria
Chile
Notes
Disclosure of unpaid
contributions within 3 M
Unpaid contributions are
checked by the National
Revenue Agency that
collects contributions
x
x
Costa Rica
PF
A
Employer
M
PF
A
Employer
M
PF
6M
x
Employer
M
x
PF
A
x
PF
A
Employer
M
PF
A
PF
Q
Custodian
Q
Mexico
PF
PF
Poland
A
A
PF
A
PF
Available on web-site
PF
A
Custodian
On request
PF
A
Hong Kong
Hungary
Ireland
Israel
PF and Advisors
Members
Supervisory Authority
PPP management company
Members
PF
Trustee
Supervisory Authority
Members
Disclosure of unpaid
contributions within 90 D
Italy
Jamaica
Kazakhstan
Kenya
x
Slovakia
Spain
Turkey
UK
Pension projections
Assumptions
How, when made available
by PF
Country
Communication of
uncertainty
defined by
Interest rates
Projections
Projectio
provided on
n linked
the SA web
to I pillar
site
Australia
Yes
Austria
Annually

Belgium

Bulgaria
Chile
Every 5 years to members aged > 45
Upon request to all members (coming)
PF and employers
To be set according to the
Pensionskasse contract/business
plan
not yet defined
not yet defined
Provided by insurance companies on their web-site
PF
Annually to members aged > 30
Authority
One single interest rate
Sensitivity on rates of
return: +-1%
Voluntary
from 2010
Sensitivity on
contribution density
Yes
Hong Kong
Hungary
Ireland
Israel
Italy
Jamaica
Yes
Annually to members < 15 years to retirement and > 15
years of membership

At joining and annually (OPP from 01.01.2008, PPP)
PF’s Actuary According to
guidelines of Society of Actuary
 Upon request to all PPP members
A max rate of return (6%) for
PPP
Annually
Authority
Assumed rates of return variable
in relation to the asset allocation
To be made available annually (OPP, PPP)
Authority
Assumed rates of return variable
in relation to the asset allocation
Annually
PF
Mexico
Slovakia
Caveat
PF
Authority
Upon request (PPP M, PPP V)
Ministry of Finance (PPP M)
Projection to be made using two
rates: 5% for all funds and actual
return obtained by each pension
fund in the last 36 months
Caveat
Yes
Caveat
Caveat
Caveat
Assumed rates of return variable
in relation to the asset allocation
Poland
Turkey
UK
Yes
Upon request to all PPP
At joining (PPP) and annually (OPP, PPP)
Regulation
Two different scenarios: (9% and
11% before 2013 (6% and 8%,
from 2013 )
Sensitivity on
rates of return
Guidance of Faculty of
Actuaries and Institute of
Actuaries (OPP)
Authority (PPP)
For OPP: maximum rate of return
(7% )
For (PPP): 5%, 7%, 9%
Caveat
Sensitivity on
rates of return (PPP)
Yes
Voluntary
Yes
the Italian experience with the introduction of
auto-enrolment into pension funds
outline of following slides
•Background information on the development of Italian pension
funds since the 90’s
•The implementation of nation-wide auto-enrolment in 2007
•The mixed results and the possible explanations
•Some evidence on the role of financial literacy and pension
awareness
•Policy suggestions from the Italian experience so far
Background info on the development
of pension funds in Italy:
The start-up
•Up to the beginning of the 90’s, there was no perceived need for pension funds directed
to all workers, as 1st pillar was generous: pension funds were limited to high salary
workers (managers of large companies, financial sector employees):
around 700.000 members, or 3% of the work force.
•In 1992 (and then in 1995) a major reform of 1st pillar pensions was introduced
(including the introduction of the NDC system), that put pension expenditure under
control and significantly reduced future benefits (although with a long transition phase).
•The need for the diffusion of pension funds to all workers (and especially the young)
became clear. New legislation, and a comprehensive regulatory and supervisory
framework was introduced in several stages from 1993. A system of “new” pension funds
was created.
The start-up
(continues)
Main features of the system:
• Pure DC
• A leading role for occupational, industry-wide pension funds
• For employers, commitment to contribute linked to labour agreements
• For workers, voluntary membership
• “Open” pension funds (set up by financial, insurance firms) directed mainly to the
self-employed, with a residual role for employed workers
The first new pension funds became operative in 1998. At the end of year 2000,
there were already about 140 new pension funds in place - about 40
“contractual”, the rest “open” – a higher number that those still in place. So-called
PIPs (insurance-like personal pension plans) were introduced in 2001.
The second phase: the need for a push
• In 2004, after several years of starting, the system looks well-built in structural
terms, but still with low membership rates: around 3m workers, or 13% of
work force.
• After a wide public debate, the automatic enrolment of all employed workers of
the private sector was introduced (with the opt-out option), directing to pension
funds the annual accrual of so-called TFR (a sort of mandatory severance pay):
about 7% of gross earnings.
• Several other new rules were introduced, mainly with the purpose to increase the
scope for competition also in the field of occupational pensions. No specific
measures were taken for the workers of the public sector and for the selfemployed.
• At end-2005 the automatic enrolment was planned for the first half of 2008. Then,
after the elections in May 2006, the new Government envisaged to shift it earlier,
to the first half of 2007. The final decision was taken in late 2006. It was also
decided that firms with 50 employees would be obliged to transfer to the Treasury
the flows of TFR that workers did not want to be paid into the pension funds.
Nation-wide auto-enrolment:
implementation in a hurry
With little time available, a “rush” phase started, implying:
• The re-drafting of all secondary regulation, to be made consistent with the new law (by
COVIP, the specialized regulator/supervisor); the new regulation included specific
emphasis to information to potential members
• The re-organization (by the funds) and the re-licensing (by the supervisor) of the pension
funds already in place, plus the setting-up and the licensing of several others
• A campaign for increasing awareness of general public (by the Ministry of Labour):
– all media were used, with special emphasis on TV and radio
– dedicated web site and call center
– monitoring of effectiveness during and after the campaign
• Many, capillary initiatives in the workplace (campaigns and meetings) organized by trade
unions, often together with the industry-wide funds
• Detailed information to be supplied by employers to workers at company level
• Marketing efforts by financial firms commercializing “open” pension funds and PIPs
The results so far
 a significant, but still unsatisfactory increase in membership:
 at end-2009, just over 5m members, or 20% of workforce, 27% of private
sector employees (most of the result already achieved at end-2007)
Moreover:
• Very few true “auto-enrolled” (or “silent”) workers (at odds with experience of other
countries). Auto-enrolment has continued to be in place for new workers, but still with
marginal results
• Membership is very diverse across sectors and funds – mainly depending on firm size and
presence of trade unions
• Participation among the young is particularly low
• Competition is still weak across different kinds of pension plans. Costs are also very
different, and the most expensive products sell well
Membership before and after the TFR reform
6
Millions of members
5
Before the
TFR reform
After the
TFR reform
4
3
2
1
0
end-2006
end-2007
end-2008
end-2009
“Old” pension funds
Contractual Pension Funds
Open pension funds
PIPs (Insurance-like personal plans)
“Old” PIPs
Contractual pension funds: membership rate and firm size
100
Industrywide funds
Company
funds
90
Membership rate (%)
80
70
60
50
40
30
20
10
0
0
20
40
60
80
100
Share of firms with 50 or more employees (%)
Two equilibria :
–a good one (role of social parts, “cafeteria effect”, peer behaviour)
–a bad one (little and distorted information)
The structure of the pension funds market in Italy
Occupational
CPF1
CPF2
OP Fs
PIPs
CPFn
Personal
Cost competition in the market for occupational plans
5 years time horizon
3,5%
3,0%
Costs % of NAV
2,5%
2,0%
25%
Worst
1,5%
50%
Central
1,0%
25% Best
0,5%
0,0%
Contractual PFs
Open PFs
Cost competition in the market for personal plans
5 and 35 years time horizon
4,0%
3,5%
Costs % of NAV
3,0%
25%
Worst
2,5%
2,0%
50%
Central
25%
Worst
1,5%
50%
Central
25%
Best
1,0%
25%
Best
0,5%
Insurance-like
Pension Plans
Opens PFs
Insurance-like
Pension Plans
Open PFs
0,0%
5 years
35 years
Explaining the results
Structural and objective factors:
• Low financial literacy and pension awareness among workers to start with
• “Saving” (in terms of contribution rates) for pensions is already high – not clear how
much room for further contributions
• For the workers, TFR is a strong competitor vis-à-vis pension funds
• TFR is good as a source of financing for smaller firms (below 50 employees) –
incentives for these employers do not work in the right direction
• Many workers (particularly among the young) are liquidity constrained. Little room for
additional savings
• Financial and economic crisis:
– increases liquidity constraints on potential members
– increases need for financing for smaller firms
– increases risk aversion, diminishes confidence in pension plans investing in
financial markets
Explaining the results (cont.)
Implementation factors:
• Hurried introduction of auto-enrolment: insufficient time to create awareness
• Insufficient effort to improve awareness on the decrease of 1st pillar pensions in the long run,
with some uncertainty about the further measures that may be introduced
• regarding pension funds, some aspects of legislation (e.g. taxation) are complex and difficult
to communicate
• Unclear public support for the TFR into the pension funds: “appetite” by the Treasury for the
TFR of larger firms
Explaining the results (cont.)
Implementation factors: (cont.)
• ”Conscious” adhesion, or “adesione consapevole” – the importance to choose - was the
main theme of the awareness campaign by the Government and trade unions – more
consistent with voluntary enrolment than with the “paternalism” that should be implicit in
auto-enrolment - some evidence that the campaign did favour the opting out
• No “true” auto-enrolment: filling a form has been made compulsory to certify “non-action”.
• In terms of contribution rate, the default is sub-optimal for the employee (as it does not
provide for the employer’s contribution, but only for the TFR)
• In terms of investment option, the default is also sub-optimal for most members: a very
conservative, guaranteed investment line
Explaining the results (cont.)
Specific issues for personal plans:
•Despite efforts made through information requirements, strong information
asymmetries between selling agents and potential members are still there
•Application of “rules of conduct“ regulation taken from MIFID is not very helpful:
clustering of clients through questionnaires and the resulting characterization of
products as suitabile/ appropriate do not address costs, and do not deal with excessive
risk aversion
A few examples:
Cost of the product
Age of potential
member
Exposure to
equity risk
Usual MIFID
characterization
high
young
low or nil
appropriate
high
old
nil
appropriate
low
old
low
inappropriate
Specific information mechanisms may be needed for pension products in order to
make competition work (e.g. comparative information, etc.)
Some evidence on financial literacy,
pension awareness, and the decision to adhere
In June 2008 COVIP commissioned a survey in order to better understand the factors
influencing workers’ choices regarding pension fund membership
(telephone interviews of about 1000 employed private sector workers)
The classic “Lusardi-style“ questions were included:
% of correct replies
Entire
sample
PF
members
not PF
members
Compound interest rate
53,5%
59%
52%
Inflation perception
48,5%
53%
47%
Difference btw. stocks and bonds
49%
55%
47%
Risk diversification
53%
61%
51%
11,4%
12,9%
11%
981
224
757
Questions on financial literacy
Relationship btw. price/yield of bonds
Sample size
Replies are in line with those of other countries and show a positive (though small)
effect of financial literacy of the decision to adhere
Some evidence on financial literacy,
pension awareness, and the decision to adhere (cont.)
A few other questions were also asked:
Questions on awareness on pension reform
(NDC vs. earning-based system, etc.)
% of correct replies
Entire
PF members
not PF
sample
members
Your benefits will depend: only on the contributions you
pay / only on your salary as an active worker / on both /
DNK
28,5%
32,6%
27,2%
How large you expect your benefits to be in terms of
your last salary: <50% / btw. 50-60% / btw. 60-80% /
>80% / DNK
63,3%
70,1%
61,2%
The PAYG system (sistema a ripartizione) is a system
where contributions paid today are used for: Paying
current retirees / paying future benefits to current active
workers / both / DNK
37,2%
44,6%
35%
Sample size
981
224
757
 Replies show a positive effect of “pension awareness” on the decision to adhere
 Preliminary results of econometric analysis through probit models show a stronger
effect of pension awareness vs. financial literacy on the decision to adhere
Policy suggestions from the Italian experience so far
Ensure consistency between education efforts and other policy tools
• clear communication on effects of 1st pillar reforms is essential (“orange envelope”, etc.):
cfr. OECD Recommendation, par.2: “promote understanding of the changing retirement
environment”
• default options are a strong way to convey education/advice; avoid sub-optimal default
options that may contradict education efforts
• policy design should create a incentive-compatible environment (e.g. making pension
fund membership of workers at least neutral for employers / Treasury)
• competition across pension products may be greatly helped by financial education, but
also needs specific devices (e.g. comparative information, etc.)
Mitigate the high risk aversion induced by the financial crisis
• Risk appetite is highly procyclical, make use appropriate investment default options (e.g.
life-cycle, target funds) that help educating members to have stable, long term
orientation and an appropriate exposure to equity risk
Policy suggestions from the Italian experience so far
(cont.)
Find the right balance of responsibilities between the State (legislation),
social partners and individuals. Soft paternalism, nudging, is useful to
complement information and education efforts directed to individuals
“One size does not fit all”, but do not escape the responsibility to advice
(trough appropriate default options) “what is likely to be the best” for the
average worker
Thank you for the attention!
for comments or questions,
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