Institutional disparities and asset allocation homologation in Italian defined contribution pension funds. How do they affect the guarantee commitment?

This paper analyzes the performance of the Italian defined contribution guaranteed pension funds during the period 2008–2012 through a panel analysis. This paper is organized around three main research questions. The first one is focused on the probability of a guarantee payment in a given year. The second one deals with the determinants of the gap between actual return and minimum guaranteed yield on a yearly basis. The third one focuses on the factors affecting the weight of administrative and management costs and their relationship with the fund dimension. The analysis applies an original hand made datased consisting in 31 Italian closed funds and 26 Italian open funds which represent 82% of total net asset value (NAV) of guaranteed schemes and 77% of the participants at the end of 2012. The paper develops an original approach by adapting the money-weighted rate of return (MWRR) used in the evaluation of asset management to the specific issues of pension funds. The analysis shows that the ability of pension funds to beat the guaranteed return is negatively affected by the generosity of the promise and is strongly dependent on the market conditions. The funds managed by insurance companies tend to perform better, probably due to their greater skills in LDI strategies. The analysis also shows that closed funds are more efficient. The costs are also positively related to the level of guaranteed return and negatively linked to the dimension of the fund measured both by the NAV and the number of adherents. More precisely, the relation between dimension and costs is U-shaped in the closed funds subsample meaning that economies of scale can be exploited only up to a certain point. On the contrary a little evidence of an inverted relationship seems to arise in the open funds subsample, likely because their fee structure is not sensitive to any pressure from competition among fund managers and because their dimension is still limited compared with closed funds. Implication: As known the pension reform has considerably reduced the net pension replacement rates of Italian workers and stability and efficiency are conditions for the divelopment of the pension fund industry. However, the actual low interest rate environment is very challenging for guaranteed pension funds since they face long term obbligations with assets that have a shorter duration. This situation threatens their profits in the medium-term and their solvency in the long-term. The paper shows that this issue deserves attention especially for those funds that offer higher guaranteed returns. As far as the second issue is concern, we highlight the lack of efficiency in the open fund segment. An active role of the regulator is desirable to stimulate mergers and acquisitions in the sector to induce a reduction of the number of funds and an increase in their dimension.