Current of caution remains
The fund for the managers of the electricity industry, was set up in 1986 under the name PIA, by Enel the national electricity provider, and was one of the first complementary second pillar funds. A bright spark on the Italian pensions landscape.
“Because the state pension was capped in those days it was too low for managers so we established a defined benefit plan,” says Stefano Pighini, a former director of Fondenel.
The 1993 law made it possible to set up defined contribution plans. Pighini notes: “between 1986 and 1993 there was a rise in inflation and it became more costly to maintain a defined benefit scheme.”
But he laments the fact that the new scheme could not be started until the passing of the decree in 1998.
Members had the choice to join the new defined contribution fund called Fondenel, or remain with the PIA defined benefit scheme. Pighini notes: “the old fund offers a better pension but it only offers a pension, which can be drawn from the age of 65; the new fund was offering the choice between taking the money and running, or investing it in a pension fund. Consequently almost everyone joined the new funds.”
Those who joined after the old defined benefit schemes closed to new members in 1993 until the passing of the decree in 1998 received an amount to cover this period.
Fondenel started with the passing of the decree in April 1998 with a membership of 1,300 and assets of over E400m. The new fund operated initially with some investments in the money market and from 1999 offered four lines of investment for members to plug into.
There was a monetary line for those that were very close to retirement, as Pighini notes, “so as to have no surprises.” Or perhaps no blown fuses.
Another investment option was a portfolio consisting of 10% equities and the rest in bonds; there was
also a balanced line with a
benchmark of 25% but with the
possibility to move the equity quota
to 50%; the third line was more
aggressive with 85% equities and 15% bonds. The more risky the line, the younger the target age group.
In order to qualify for a pension members had to remain with the company from the inception of the fund in April 1998 until January 2001. After that date the fund lost around a third of its membership and almost two thirds of its assets as people retired.
The monetary line accounts for 9% of the total assets of the fund; the bond line represents a further 30%, 9% have chosen the aggressive line while the majority of assets, some 52%, are in the balanced line. “The aggressive line has been growing steadily while the monetary line has been decreasing, because of the changing age profile,” says Pighini. He also agrees that preferences are changing because people are seeing that the stock market is doing better.
Since 1999 the equity line achieved an average negative return of 16%; the other lines were all positive, with the monetary line returning 18%, the bond line 25% and 21% in balanced line. In 2003 all lines achieved positive returns: 12% on the equity line, 7% on the balanced line, 5% on the bond line and 2.8% on the monetary line. So there has clearly been some fluctuation.
There has been little change in the composition of equities and bonds since the fund was set up. “The reference for the balanced mandate is the benchmark and the tracking error and it is up to managers to make the right choice,” says Pighini.
When there were E400m of assets the fund had four different managers; now that the fund is smaller there are only two, both with balanced mandates. They manage half of each line according to the MSCI Worldwide index benchmark. The fund uses the JP Morgan index for bonds.
He explains that his strategy is to make the managers compete on the benchmark. “If a manager loses both against the benchmark and against the other manager it would have to retire,” he says.
Other than the benchmark the main constraint is the minimum triple-B rating stipulated for corporate bonds. There are no high yield bonds in the portfolio which are considered too risky. Too much downside can be a shock to the system.
While we are seeing a gradual increase in the level of interest in specialised mandates in Italy, Pighini notes that “this is not the case with us.”
He adds: “Of course we chose to assign the more aggressive mandate to the manager with more skill in that area, and same with the bond mandate, so we make choice of the manager according to their performance in one field or another.”
A logical approach which would benefit from the improved funding and information that is expected in the new legislation.