Fonchim is on course, Fennell Betson reports

In modest offices in a nondescript street in the north of Milan, Italy is taking its first step into its new second pillar pensions system. The step is a giant one.

As the first of the major group arrangements to receive official go-ahead, the scheme for the country's chemical industry will have an initial membership of 65,000; this could well reach 100,000 by mid-year.

Since the go-ahead in December, the organisers have been putting in place the final structure of Fonchim - as the scheme has been branded.

All this, including the setting up of the no-frills offices and the appointment of an investment director, is being done under the watchful and experienced eyes of chairman Alberto Giordanetti, who is president of the Ciba chemical operations in Italy and has been a guiding hand in bringing this enterprise into being. We are now in the first starting phase," he declares, referring to the few months they have to get Fonchim up and fully running.

But it has been a long haul for those committed to the idea from the time it was first mooted in 1993 and received the approval of both sides of the labour divide within the industry in 1995. By mid-July last year, more than double the minimum of 30,000 members required to go ahead had indicated they would join the scheme, which meant Fonchim could go live once official approval was obtained. The message has been getting across: the generous state retirement provision is coming under severe pressure and Fonchim will play a part in maintaining standards of living in retirement, says Giordanetti. "It gives employees an opportunity to build up a second pension completing the official state pension."

But with social security contributions running at over 30% of salaries, the scope for additional contributions is limited at this stage. Also, the fiscal incentives available are restricted. "We have two sources of contributions - the first is the employees, who pay 1% of their salary, and the second is the employers who also pay in 1% of salaries," says Giordanetti.

But in addition, the employers pay in part of the payment towards the leaving indemnity rights, the TFR, which he describes as a "unique Italian institution". Employers have the ability to administer this within the company currently, but under the agreement, they have accepted that part of this be transferred to Fonchim. He points out: "All of this now becomes the property of the employee and no longer belongs to the employer." Thus the employer's contributions work at more than double those of the employee. "So of every 100 lira paid into Fonchim, 65 are paid by the company and 35 by the employee."

Giordanetti expects that, with the fund starting in spring, it will have L200bn($110m) invested by the end of 1998. "In four years' time our capital will be about L1,000bn - so it is a lot of money. "The aim is to run the whole operation very tightly and simply, with the main activities being outsourced, he says. "It will be run by the director and just four or five others."

Fonchim is outsourcing the custodian banking services, which will include collecting the contributions and passing these to the investment managers. The administration is also being outsourced, which will include the accounting systems for each member, as the scheme is being run on a defined contribution basis.As the first step to appointing the service providers, the board of 12 responsible for the fund organised meetings with a range of banks, asset managers and administration providers. "This was to receive input and to improve our information and knowledge," says Giordanetti, pointing out that this was a first for the market and there were no guidelines to work by. "There were two full days, for example, devoted to eight asset managers, who made presentations for two hours each. These were interactive meetings, with those of us on the board asking many questions to increase our knowledge. "Then the formal assessments process began for both the banking and administration services, with a public announcement, when offers were invited. "About 20 offers were received for each of these," he says. After "desk-selection", five were shortlisted for each service and they were interviewed by a task force of the board, resulting in a first choice and a "reserve". In fact, Fonchim negotiated an agreement with both first choices. "It was a very full and frank discussion process," observes Giordanetti.

There is a minimum period for each agreement, after which Fonchim has the right to terminate. The chosen bank is the Istituto Centrale Banco Popolari Italiano and the administration provider is Andersen Consulting in Milan. The reckoning in the marketplace is that the deals negotiated were very keenly priced. "Now we have started the most difficult part of the programme, which is the selection of the asset managers and we will follow the same procedure," he says. An official notice requesting expressions of interest from investment managers was to be issued by the end of last month. "Then the desk selection will be followed by face-to-face interviews and the final selection of probably six managers." The timetable is pretty tight as Fonchim hopes to start the investment programme in April, all being well.The numbers of managers does not mean a specialist approach, he says. "All managers will have balanced portfolios, but some will have different percentages between bonds and stocks."

The fund could be divided into two portfolios, one slightly more adventurous than the other. But Giordanetti warns: "What we have in mind all-in-all is a relatively conservative investment policy. We do not have the right to put the money of workers into too high-risk investments." The investments will be in one common fund in which contributions will be allocated to shares in the fund. "At retirement, they will have the right to take a lump sum up to 50% of the their own holdings and the balance as an income, with the usual benefits for widows and family and so on."The bank will advise the managers on a daily basis the funds available to them. "The service provider has to maintain an up-to-date personal dossier of each member, including the amounts paid in and the performance of the investments, to be able to tell members about their situation anytime." Day-to-day dealings will be handled by Fonchim's new investment director Andrea Giradelli, who joined last month from Société Générale, and the office staff. "But the board will decide whether the investment fund performance is satisfactory and if necessary switch to others." The board will report to members at least once a year and may be more frequently. Giordanetti adds: "We have received a lot of messages from asset managers everywhere." There are no restrictions about choosing national or international managers, though they have to have a base of operations within the EU. "But there are no limits imposed as to where the money can be invested." Fonchim hopes it can clear all the hurdles for the asset managers pretty swiftly.

Mid-year it hopes that another 20,000-plus members will join from employees in the glass and lighting industries. The potential market among the chemical workers is 180,000, but some companies have not joined for their employees, such as the former state-owned group ENI and Bayer in Italy. "They have said they will stay out, but in the future they could decide to come into Fonchim. But Glaxo Wellcome, for example, has joined." Giordanetti points out the voluntary nature of employees' joining, once their employer agrees to participate. "The important thing about Fonchim is that it is the employee's decision, not the employers."

Fears were expressed in the Italian press that younger workers were not joining Fonchim, but Giordanetti says this is not so, the age profile of members mirrors that of the industry generally.

The board of 12 is divided equally between employer and employee representatives. It is appointed by an assembly of 50 members, also on a joint worker and employer basis. "It has been a very interesting task for all the board members, who have had to work very hard." Board meetings have been every 10-12 days, which he reckons is too often. But they are pleased with the progress so far. "Our first breakeven point to start the scheme was 30,000 and this has more than doubled. Weare very satisfied and are optimistic for the future. Greater awareness about Fonchim is developing."

Fonchim will undoubtedly act as the trailblazer for the other group schemes, some indeed will be even larger, now in the pipeline for approval. As Giordianetti says: "Our problem is that we are the first. Consequently, we have had to invent everything as we have no model of reference in Italy.""

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