A Comparative Analysis of the Costs of Italian Individual Pension Plans

This paper analyzes the costs of third-pillar individual pension plans currently available in Italy, namely pension insurance policies and open pension funds, which are new products in the Italian savings market. For lack of data on annuities, the analysis is limited to the accumulation phase. To evaluate costs, we use different simulation scenarios, changing the length of the contribution period and the gross returns attainable on financial markets; we also consider participants with different life income and contribution profiles. Following international literature, we present cost measures which reflect the reduction in both the final accumulated pension wealth and the annual rate of return. The main result of our analysis is the existence of a substantial dichotomy in the market. On one side, open pension funds have moderate costs, close to those of voluntary pension plans in other countries and also to those of the Italian occupational pension funds (i.e. the second pillar). On the other, individual insurance policies are burdened by significantly higher charges. We consider different possible rationales for these costs, including the fact that the market is at a very early stage of development, without reaching a completely satisfactory explanation. Finally, we also study the possible regressive feature of the fee structure and the unfavourable treatment of early withdrawals of private pension assets; we conclude that both are indeed present in the majority of products, but that their impact is fairly limited.