UNICREDITO ITALIANO

UNICREDITO ITALIANO Alessandro Profumo - CEO

UBM 3rd ITALIAN CONFERENCE - FINANCIAL SECTOR

Milan - November 8th, 2001

“PENSION REFORM: A GROWTH DRIVER FOR THE FUTURE?”

2

PENSION REFORM: A GROWTH DRIVER IN THE FUTURE ?

Government has given up important direct responsibilities in assuring high living standards to retirees. Now households need to review the way they allocate their savings

Financial institutions have a fundamental role and a responsibility in this process. This responsibility has become even greater now, as investment opportunities enter a more difficult term

Given that, can pension reform become a growth opportunity for Italian banks and insurance companies ?

3

Structural impacts of the Italian Pension Reform

Perspectives for the Italian pension fund industry

UCI’s integrated approach to the pension business

Conclusions

Agenda

4

IN THE LAST DECADE PERSPECTIVE PENSION BURDEN ON PUBLIC FINANCES FORCED STATES TO REDUCE THEIR GENEROSITY

The “ageing population” forced most governments to progressively reduce the benefits paid out for public

pensions making the case for households to divert a larger sum of their earnings for precautionary purposes

Projected public spending as percentage of GDP

0

5

10

15

20

25

1995 2000 2010 2020 2030 2040 2050 2060 2070

% o

f G

DP

Italy Germany France Japan Canada USA United Kingdom

Source: OECD

5

Pension wages calculated

using a life earnings

related method

57 years of age and 35

years of contribution or

40 years of contribution


using a mixed life earnings

/contributions model

57 years of age and 35

years of contribution or

40 years of contribution

Older workers

(more than 18 years

of contribution)

Middle Age workers

(less than 18 years

of contribution)


using a contributions based

model

Last 5 yrs average salary

Last month’s salary

Last 10 yrs average income

Years of contribution for

eligibility

Seniority Pensions: Min. years of

contribution for eligibility

15

57-65

65 men, 60 women

65

60 men, 55 women

65

65 men, 55 women

MAJOR CHANGES INTRODUCED IN ITALY BY THE AMATO AND DINI REFORMS...

PRE 1992

Retirement Age

Source: OECD

Pension wages

Private employees

Public employees

Self employed

AMATO REFORM - 1992Private employees

& Self employed

Public employees

DINI REFORM - 1995

Young workers

65 men, 60 women

65 men, 60 women

20

20

5

20

20

35

20 men, 15 women

35

Increasing for

public employees

-

Average of whole working

life earnings, re-evaluated

at 1% annually

6

... OPENED THE WAY FOR PRIVATE MARKETS…

PENSION REFORM DEBATE WENT ALONG WITH THE DEFINITION OF THREE PILLARS

I Pillar - PUBLIC PENSION:generally financed on a pay-as-you-go basis and compulsory

II Pillar - OCCUPATIONAL PENSIONS:pensions generally set up by employers or a trade union and mostly administered by private institutions

III Pillar: PERSONAL SAVINGS AND RETIREMENT PLANS: set on an individual and voluntary basis, fully funded

7

…AND MADE THE CASE FOR MORE PRECAUTIONARY SAVINGS

IN ITALY THE ADJUSTMENTS INTRODUCED TO THE FORMER PAY-AS-YOU-GO SYSTEM WITH THE AMATO (1992) AND DINI

(1995) REFORMS HAS OPENED UP THREE MAIN ISSUES:

Social security gap in the case of younger cohorts

Retirement gap for middle and high-income households

Loss of purchasing power of older retirees compared to younger retirees due to the fact that pension benefits are not indexed to GDP growth (like contributions), but to the sole cost of living

8

SOCIAL SECURITY GAP: YOUNG COHORTS VERSUS OLD COHORTS

20

30

40

50

35 36 37 38 39 40

1942

1952

1962

1972

1982

SOCIAL SECURITY GAP: YOUNGER COHORTS RECEIVE A MUCH LOWER PUBLIC PENSION BENEFIT RELATIVE TO THEIR FINAL PAY

PER

CEN

TA

GE G

AP

BETW

EEN

PA

Y

AN

D P

EN

SIO

N B

EN

EFIT

S

YEARS OF CONTRIBUTION

Younger cohorts show a larger social security gap compared to older cohorts. The shorter the contribution

period, the larger the disadvantage

Source: E. Fornero, “L’Economia dei Fondi Pensione”, 1999

YEAR OF BIRTH

9

EMPLOYEES

RETIREMENT GAP: LOW INCOME VERSUS MIDDLE AND HIGH INCOME HOUSEHOLDS

01020304050607080

57 58 59 60 61 62 63 64 65

30.000 Euro 60.000 Euro 100.000 Euro

01020304050607080

57 58 59 60 61 62 63 64 65

RETIR

EM

EN

T G

AP

%R

ETIR

EM

EN

T G

AP

%

AGE OF RETIREMENT

AGE OF RETIREMENT

SELF-EMPLOYED WORKERS

Current Pillar II schemes are far from succeeding in closing the gap between last pay and retirement income in the case of middle and high-income individuals

Self-employed workers more penalised than employees

AVERAGE YEARLY INCOME

Source: PGAM Research30.000 Euro 60.000 Euro 100.000 EuroAVERAGE YEARLY INCOME

10

Pensions indexed to inflation (and not to real wages) imply that the farthest in time the retirement date, the larger the gap with new retirees. According to our simulation models, assuming a real wage growth of 2%, an individual

who retired 10 years ago would receive a benefit 16% lower than a new retiree with the same final wage and years of contributions. The gap widens

to 38% in the case of an individual who retired 25 years ago

PURCHASING POWER AND PENSIONS INDEXED TO THE COST OF LIVING

0

20

40

60

80

100

120

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

YEARS OF RETIREMENT

PENSIONS INDEXED TO INFLATION IMPLY A SUBSTANTIAL LOSS IN PURCHASING POWER OF OLD VS NEW RETIREES, WHOSE BENEFITS ARE BASED ON NOMINAL WAGES

PU

RC

HA

SIN

G P

OW

ER

ER

OS

ION

FO

R N

EW

RETIR

EES

%

Yearly real wage growth: 2%

Source: PGAM Research

KEY ASSUMPTION:

11

PENSION FUND INDUSTRY IS STILL IN ITS INFANCY IN ITALY

0

20

40

60

80

100

USA Netherlands UK Canada Japan France Germany Italy

%

PENSION FUNDS AS PERCENTAGE OF GDP

The Pension Funds industry is still at its infancy in Italy, representing just 1.1% of total household financial assets (11% including life insurance

schemes) and just 3% of GDP in 2000

The picture contrasts sharply with that of more developed capital and savings markets like USA, UK and the Netherlands where pension funds

already represent over 80%of GDP

12




Conclusions

Agenda

13

1996 Households’ total financial assets: Euro 1,878 bn

2000 Households’ total financial assets: Euro 2,602 bn

IN THE LAST FOUR YEARS PENSION PRODUCTS DID NOT FULLY BENEFIT FROM THE STRONG GROWTH OF TOTAL FINANCIAL ASSETS IN ITALY ...

Italian savings market witnessed an unprecedented growth in the past 4 years (CAGR 8.5%). The development of capital markets went hand in hand with households progressively reducing their risk aversion, as shown by the rise of the portion of assets diverted to mutual funds and shares

Source: Bank of Italy

Life/Pensions: 10%Other: 3%

Deposits: 30%

Bonds: 30%Mutual Funds: 5%

Equities: 22%

Life/Pensions: 11%Other: 2%

Deposits: 25%

Bonds: 19%Mutual Funds: 18%

Equities: 25%

+8.5%CAGR

1996-2000

Pension funds could scarcely benefit from this growth, mainly due to legal uncertainties and lack of products

14

Our models suggest that pensions funds will account for at least 25% of total financial assets from the current 1.1% and pension funds+life insurance will grow from the current 11% to 40%

…BUT ARE SET TO EXPAND RAPIDLY IN THE NEXT 20 YEARS ...

0 2,000 4,000 6,000 8,000

2000

2020E

HOUSEHOLD FINANCIAL ASSET MIX IN 2000 AND 2020E

12% 15% 25% 48%

71%18% 10%

1%

Mutual Funds Life Insurance Pensions Funds Other assets

Even if Italian households are likely to keep a more cautious view on financial markets, in 20 years we believe they will likely tend to show an asset mix closer to those markets where the pension fund industry is already a reality (USA, UK, The Netherlands)


Euro bn

15

… AND TO BECOME ONE OF THE FASTEST GROWING ASSET CLASSES

PENSION FUND INDUSTRY SET TO GROW STRONGLY IN THE NEXT 20 YEARSEuro bn

This will be due to the diversion of a larger portion of savings to pension funds and life insurance products and to a partial switch of assets from other investment categories

UCI estimates that the Italian pension fund market will total Euro 2,000 bn in 2020 (Euro 3,200 bn considering also life insurance). This would imply a 2001-2020 CAGR of 23.5% for the pension fund industry (13% CAGR taking into account also life insurance)

+23.5%

CAGR2001-2020

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020


16

Huge increase in volatility mainly due to: Higher households’ risk propensity The “Internet bubble” Quick diffusion of derivatives

THE UPWARD TREND OF VOLATILITY...

Source: UBM Research on Datastream data

50

70

90

110

130

150

170

190

210

230

oct-92

apr-93

oct-93

apr-94

oct-94

apr-95

oct-95

apr-96

oct-96

apr-97

oct-97

apr-98

oct-98

apr-99

oct-99

apr-00

oct-00

apr-01

oct-01

EQUITY AND BOND MARKETS IMPLICIT VOLATILITY TRENDS IN THE LAST 10 YEARS

S&P500 Implicit Cluster Volatility Re-based

JP Morgan Global Bonds Implicit Cluster Volatility Re-based

BASE19.10.1992=100

17

... AND THE RECENT FINANCIAL MARKETS TURMOIL MADE IT CLEAR THAT INVESTING IN PURE EQUITY PRODUCTS IS NOT SAFE FOR PENSION PURPOSES

EQUITY MARKETS PERFORMANCE

Source: Datastream

SHIFTING OF HOUSEHOLD SAVINGS INTO A LONG-TERM PERSPECTIVE BECOMES A MUST

80

100

120

140

160

180

200

jan

-98

ap

r-9

8

jul-

98

oct-

98

jan

-99

ap

r-9

9

jul-

99

oct-

99

jan

-00

ap

r-0

0

jul-

00

oct-

00

jan

-01

ap

r-0

1

jul-

01

oct-

01

Dax index S&P composite Milan Comit

Unlucky retirees

Lucky retirees

COULD IT HAPPEN AGAIN?

Long-term financial market

growth estimates have been cut by the majority of analysts and strategists

18

INCREASED RISK AND RISK AVERSION REQUIRE PROFESSIONAL SERVICES

HOUSEHOLDS WILL ASK MORE THAN IN THE PAST FOR PROFESSIONAL “ADVICE” ESPECIALLY IN THE CASE OF LONG TERM INVESTMENTS

The economic outlook and the recent political developments could seriously affect the financial markets in the short and medium term

Increased risk and risk aversion, due to higher volatility and divergent trends across the various categories of financial assets, make a professional approach to financial markets more relevant than in the past

Household needs for professional advice, sophisticated products and ALM techniques are even more urgent when long term investments are aimed at guaranteeing an appropriate standard of living after retirement

THIS IS THE NEW CHALLENGE AND

OPPORTUNITY FOR FINANCIAL

INSTITUTIONS

19




Conclusions

Agenda

20

Proven long term results, based on sound investment process and active

management

UCI’S PATH TO DELIVERING LONG TERM RESULTS IS CONSISTENT WITH THE EXPECTATIONS FOR RETIREMENT SAVINGS

a strong and disciplined Asset Management Factory the investment bank’s ability to provide innovative

risk protection a widespread efficient distribution network

Risk Management culture

2,924 branches to serve more than

6.5 mln customers

IN THE NEW PENSION FUND MARKET UCI WILL LEVERAGE ON THESE THREE PILLARS:

21

Stock picking based on bottom-up research and fundamental analysis has proved to be winning in the long term

PIONEER: EXCELLENT LONG TERM RESULTS THROUGH A CONSISTENT APPROACH...

BOTTOM-UP RESEARCH ...

ACTIVE MANAGEMENT ...

Active management can better identify those assets with above average growth potential on a medium-to-long term basis

32 Analysts61 Portfolio Managers25 Quantitative

Researchers3 Global Research Hubs:

Boston, Dublin, Milan

... THANKS TO A FACTORY BUILD UP TO SUPPORT OUR STRATEGY

22

... AS DEMONSTRATED BY OUR US FLAGSHIP FUND PERFORMANCE

PIONEER FUND PERFORMANCE$10,000 initial investment on 3/1/28 (POP Class A Shares Only)

*Reflects deduction of the maximum sales charge of 5.75% and assumes reinvestment of all distributions at net asset value. Reflects Class A Share performance. Sources: Towers Data.

Assumptions:Investment period: 1/3/28 (Fund inception 13/2/28) through 31/8/01.$10,000 initial investments in Pioneer Fund and the S&P 500.

3/28 3/48 3/783/583/38 8/013/68 3/88

$10,000

Pioneer Fund$76,644,617

S&P 500$13,367,889

Pioneer Fund Class A Shares Public

Offer Price*Net Asset

ValueS&P 500

+15.6% +14.3% +13.3%+10.1% +8.0% +7.1%-16.8% -21.6% -24.3%

5 YEARS3 YEARS1 YEAR

23

SECOND STEP: capital guaranteed segregated accounts and life products

UBM & TRADINGLAB: ENGINEERING RISK PROTECTED EQUITY&FUND LINKED PRODUCTS ...

FIRST STEP: fund and equity linked notes with capital protection

PRODUCT RANGE

Base 108

Valore Più

Cap. Premium

Linea Protetta

UniStar

ONE COMMON CONCEPT

Freedom for the asset manager; equity up to 60% of total capital invested

Low capital absorption (according to B.I. standards)

Higher equity content of AUM Higher market market share in wealth management

ADVANTAGES FOR THE WHOLESALER:

Spinnaker

All Banks

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... THAT HAVE PROVEN TO BE CLEARLY SUCCESSFUL IN A RISKIER SCENARIO

ITALIAN BANKING+ +

CAPITAL GUARANTEED PRODUCTS: EURO 4.87 bn CUMULATED NET INFLOWS AS OF 31.10.2001

260.4200

400

600

800

1,000

(Euro mln)

0

208.0

774.1

298.5

197.3 236.0

213.6 171.9

MAY 2001

JUNE 2001

JULY 2001

AUG. 2001

SEPT. 2001

Segregated Accounts

Unit Linked

MAR 2001

464.7 381.0

250.6

15.9

Fund Indexed Notes

1,200

1,400

OCT. 2001

990.9

406.9

25

OUR DISTRIBUTION EFFECTIVENESS IS CONFIRMED BY INCREASING MARKET SHARES IN BANCASSURANCE

UCI Insurance Portfolio

Dec. 2000

Market Share

%

Jan.-Sept.2001

UCI New Production

6,006

Source: UCI accounting and IAMA

Sept. 2001

Market Share

%

Market Share

%

UNIT LINKED

INDEX LINKED

PURE LIFE POLICIES

TOTAL

(Euro mln)

21.2% 8,962 22.8% 2,956 27.2%

207 0.7% 207 0.6% - N.m.

516 0.4% 540 0.4% 24 0.4%

6,729 3.8% 9,709 4.9% 2,980 12.6%

26

IN 1H2001 UCI HAS SHOWN A CLEAR LEADERSHIP IN UNIT-LINKED AND TOTAL LIFE PREMIUMS NEW PRODUCTION

Source: IAMA

NEW PRODUCTION: UCI’s PREMIUMS WRITTEN MARKET SHARE (AS AT JUNE 2001)

7.7%6.7% 6.6%

5.9%4.4% 3.7% 3.4% 3.2% 2.7% 2.5% 2.1%

12.3%

Cred

itra

s - C

U vita

Sanp

aolo

vita

- life

Roma

Vita

Cattol

ica

Post

e Vit

a

Allean

za

Bnl V

ita

Cisa

lpin

a Pr

ev.

Carivi

ta

Med

iola

num

Mpv

ita

- Gro

wlif

e

Assib

a

Total Life Insurance Market

1.9%

9.1%

2.6%0% 1.5% 2.8% 4.0% 4.9%

2.0%4.5%

1.0%

25.7% Unit-Linked

Cred

itra

s - C

U vita

Sanp

aolo

vita

- life

Roma

Vita

Cattol

ica

Post

e Vit

a

Allean

za

Bnl V

ita

Cisa

lpin

a Pr

ev.

Carivi

ta

Med

iola

num

Mpv

ita

- Gro

wlif

e

Assib

a

27

New communication models:communication models currently used

in Italy are clearly inefficient

“NEW GENERATION” PENSION PRODUCTS REQUIRE A MORE FOCUSED AND DISTINCTIVE DISTRIBUTION MODEL

PFP approach redesign: new philosophy, new mechanism for

performance measurement, new targets

NEW PENSION PRODUCTS

DISTRIBUTION MODEL

New variables (besides wealth and income) becoming

more and more important

PERSONAL FINANCIAL PLANNING

COMMUNICATIONCUSTOMER

SEGMENTATION

28

Fiscal Optimisation

Product Selection

From pure risk-profile analysis to focus on multiple variables (i.e. level of employment and of contributions paid to State-based pension programs)

Fiscal optimisation becoming not only a target, but also a key driver for product selection

From simulation based on time series to multi-stage statistical models, taking into account different financial market scenarios

Capital Guaranteed and Life Insurance products becoming a key pillar for an efficient asset allocation

Individual social security and retirement gaps measurement

Deep analysis of customers’ attitude towards “innovative” products (like “defined contribution” or capital guaranteed products)

PERSONAL FINANCIAL PLANNING REDESIGN

Customer Segmentation

Wealth-trend Simulation

Customer Understanding

29

Age

TRADITIONAL CUSTOMER SEGMENTATION IS NO LONGER ANSWERING

FROM TO

Coverage of the current living standards by State-based pension programs; growth potential of current income

Number of years for “pension savings” before retirement

Wealth

Income

Investment Attitude

Age

Wealth

Income

Investment Attitude

Current type and level of employment

Contributions paid to State-based pension programs

Family/Marital status

Assets available to cover the social security gap

Saving potential for pension products; possible fiscal benefits

Individuation of the asset allocation profile

State-pension rights matured and to be matured

Benefits to be reverted in case of death

30




Conclusions

Agenda

31

WE THINK THAT PENSION REFORM WILL BECOME A GROWTH DRIVER IN THE FUTURE FOR THOSE INSTITUTIONS BEST EQUIPPED TO ATTRACT PENSION INVESTMENTS

The recent changes in the Italian pension system will force people to shift a large part of their savings to pension purposes, in order to fill social security and retirement gaps and to preserve the purchasing power of their pensions

Only financial institutions with strong financial engineering skills and higher understanding of households’ pension needs will be successful in exploiting the challenge of the new market

UniCredito is at the forefront in addressing this new challenge

UNICREDITO ITALIANO

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