After the Credit Suisse crisis, there is another threat to the credit system: pension funds. The rapid increase in interest rates and the decline in the stock market caused by geopolitical tensions led to a decrease in pension fund returns, bringing the much-supported additional pension to the agenda. If it is true that future retirees will receive mini-checks due to the transition from the salary system to the contribution system, it is also true that the supplementary pension solution does not work for now.
Pension funds’ performance was negative as the TFR (severance pay) remaining in the company in 2022 entered an incredible revaluation thanks to inflation. Because pension funds exceed severance pay (unfortunately, in the long run as well), it risks depriving banks of liquidity, putting the system in a stalemate and not just that. Meanwhile, there is mind-boggling speculation that the government is looking to reintroduce additional pensions (which will be one of the building blocks of the 2024 pension reform) to cover losses and rebuild pension fund assets.
“The negative consequences of pension funds are mainly due to the market environment, we should not think that they are inefficient,” Paola Ferrari, an analyst at independent consulting firm Consultique, said in an interview with Today. Commenting that “all kinds of investments in the financial markets showed a negative performance in 2022”, the expert reminded that it is wrong to evaluate additional retirement on “only return”. Let’s go in order.
The black year of pension funds
2022 was a critical year for pension funds, which declined by 9.8% in mutual funds, 10.7% in open-ended funds and 11.5% in Individual Pension Plans (PIP). This is what has emerged from the last monitoring of the Pension Fund Supervisory Commission (Covip) which links the negative performance of pension funds to the post-pandemic, the war in Ukraine and above all the spike in interest rates. The ECB is trying to reduce inflation.
What about severance pay left in the company? It revalued 8.3%, making supplemental pensions less competitive for at least 2022. So, is leaving the severance at the company the best choice to make? “This is a special market situation – explained Ferrari – because both stocks and bonds fell last year, so all funds posted a negative return. TFR, on the other hand, said, “Inflation has performed spectacularly. However, these results are in line with the current market scenario, it is not certain that this will hold true in the future. The analyst reminded that at the beginning of 2022, we are facing the opposite situation in practice”.
Is severance pay better than pension funds?
The decline in pension fund yields in 2022 is linked to a number of concurrent factors: the war in Ukraine, inflation and a spike in interest rates. Conclusion? Stock and bond markets closed the year in the red. Bond limits, in particular, were affected by the rapid rise in interest rates: the rise in the cost of money actually caused the price (and therefore the value) of the bonds the funds held in their portfolio to fall. And so pension funds started posting double-digit losses. However, Ferrari said, “Due to the specific market context, all kinds of investments have had negative performances in 2022.”
This is exactly why Covip has decided to calculate the 10-year returns, documenting that TFR remains behind in pension funds even in the long run. From the beginning of 2013 to the end of 2022, the average compound annual return (excluding management costs and taxes) is 2.2% for trading funds, 2.5% for open-end funds, 2.9% for class III Pips and class was 2%. I management In the same period, the revaluation of severance pay was 2.4% per annum.
Pension funds: “It’s not just returns that need attention”
For now, 10 and 15 years severance pay outstrips guaranteed and bail payments. “Beyond the payoff – commented – it should also be considered that by making a payment to a category fund, one is also entitled to an employer contribution that could partially compensate for the pension funds’ lower performance compared to the severance that remains in the company,” Ferrari commented.
Those who choose a complementary pension then enjoy certain tax benefits. In fact, the taxation of severance pay remaining in the company is much higher than the taxation of contributions paid to the pension fund. In addition, voluntary contributions to supplementary pension plans are deductible from personal income tax up to the maximum limit set by law, up to €5,164.57 per year.
TFR in the company or pension funds: what to choose
“We recommend the pension fund for a young worker with a long work horizon, especially for the category that will benefit from employer contributions. Instead, for someone who currently has severance pay at the company,” Ferrari said. And a few years after his retirement, considering the current inflation, we recommend that he stay with the company.”
These variables may differ when choosing a pension fund, depending on management and loading costs and TFR’s restrictions on advance demand (health costs, purchase of first home, layoff, etc.). “However, the most important thing for savers is to understand what the retirement differentials will be, because it depends on you deciding how much you need to set aside to have adequate resources when you leave the world of work”.
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Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
