Pension funds and investment lines: making the right choice

Despite the increase in the number of members of supplementary  bond pension schemes, the choice of the investment sector is still very often inefficient (especially for the youngest), thus making long-term pension savings less profitable

The good news, despite COVID-19, is the increase in the number of those who decide to join one of the forms of supplementary pension. The less good one is that too many adherents still make an inefficient choice of the investment sector concerning their characteristics. Before entering into the merits of the topic, it is useful to report some of the data contained in the September 2021 COVIP update “Complementary pension. Main statistical data ”, data that make it possible to trace the reference framework. 


Subscribers, resources, and returns

VIP, in September 2021, recorded an increase in existing positions with complementary pension schemes, up by + 2.5% compared to the end of 2020 (9.57 million). If the increase is eliminated by those who join several forms at the same time, the estimate of the number of members is 8.6 million. Negotiated pension funds recorded a growth of new positions equal to + 2.8%, largely due to those funds that provide for contractual adhesion (almost half of the 91,000 new registrations refer to the fund aimed at workers in the construction sector). Open-end pension funds recorded + 4.3% and new PIPs + 2%, reaching 1.7 million and 3.6 million positions respectively at the end of September 2021. 

The resources allocated to services are also growing: compared to the end of last year, there has been an overall increase of about 10 billion euros, thus exceeding 208 billion. Negotiated pension funds, in the first 9 months of 2021, mark + 5.8%, open-end funds + 8.9% and new PIPs + 8.1%. The yields were also good, net of management costs and taxation, respectively, at 3.1% and 4.1% for trading funds and open-ended funds; for class III PIPs, the yields were, on the other hand, 7.3%. However, by extending the reference horizon over a more appropriate time frame to assess the performance of long-term retirement investment, in the period from the beginning of 2011 to the end of September 2021, the average annual compound yield was 3.7% for the trading funds, 3.8% for the open-ended funds, and 3.8% for the class III PIPs and to 2.3% for the management of class I. It should be noted that in the same period the revaluation of the severance pay stopped at 1.9% per annum.



The importance of choosing a suitable investment sector

When you decide to join a complete pension plan, there is one aspect that is essential not to overlook: choosing the investment sector in which to make your contributions. From the point of view of the structuring of the investment lines, the possibilities are more or less the same for all the funds that generally have a guaranteed, a bond, a balanced, and an equity profile. Of course, the difference lies in the percentage of exposure to the equity market of which each sub-fund is composed and, consequently, in the level of risk that characterizes it.

Having said this, and bearing in mind that the case of long-term retirement investment is being considered, the decision to join a more or less risky sector can be substantially traced back to the reference time horizon. Or, to put it better, the time that the member needs to accrue the pension requirements and therefore request the supplementary pension benefit. Quite simply, the further away you are from retirement, the more it may be preferable to direct your attention to sectors with a higher equity component and therefore riskier.

But are adherents leaning towards the most efficient investment solution? If we take into consideration the graph taken from the “COVIP report for the year 2020” which represents the members of the supplementary pension scheme by investment profile and age group, we can see that this is not always the case.

Figure 1 – Subscribers by investment profile and age groups

Source: COVIP report for the year 2020

Although the increase in investment in the guaranteed and bond sectors jumps to the eye as the age of the member grows, vice versa, especially among the younger ones, there are still many who allocate their contributions to sectors with a risk profile that is too high content. This can mean, in terms of investment objectives, inefficiently allocating one’s contribution. A young member of a pension fund (but this can be extended to any other savings/investment instrument) should prefer investment profiles characterized by a high share composition. This is because, having a very long contribution period ahead of him, he can benefit from the higher expected return in the long term of the stock market, while benefiting from a long time ahead of him to make up for any losses accumulated in the short term. On the contrary, for a member who is close to retirement age, it could be more useful to reshape his risk exposure by leaning towards low risk or guaranteed lines to preserve the capital accumulated over time, maintain its value, and not run the risk of nullifying the risk. path completed. 

If at first glance it might seem like a small detail, in reality, the choice of an inefficient investment line can affect, and a lot, the extent of the benefit that you will receive once the pension requirements are accrued. Whether it is limited financial education, lack of information, or lack of interest on the part of the member himself, there must be a serious awareness-raising activity in particular towards younger potential members so that they choose the risk profile most consistent with the time horizon they have in front of them. 

Comments are closed