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Special Report

ESG: The metrics jigsaw


Pensions downturn

Employee take up for Italy's new pension funds has been very slow - with one of the problems quite literally that the country's schemes are showing little maturity.
The ‘closed-end’ funds, created through trade union agreements and dedicated to industrial sectors are having ‘political’ problems. But the open-end funds - created, offered and managed by banks, insurance companies and unit trust managers for self employed people - are not enjoying a boom either. So far, only about 30,000 people have subscribed to them, contributing around L200bn (E103m).
A primary reason seems that open-end funds have few fiscal incentives, and if anything they even have some fiscal draw backs - namely only allowing investors to deduct contributions from their taxable income only up to 6% of the same income (maximum L5m) which is quite a small amount.
Parliament is discussing whether to double these incentives, but any possible change would only be applicable from 2001. And only 12.5% of the annuities provided by these funds will be tax free with 87.5% taxed as income, while only 60% of annuities provided by traditional life insurances is taxed and 40% is tax free.
Secondly, open-end pension funds are quite expensive. Average commissions, including initial and annual charges - both administrative and financial - are more expensive than those for unit trusts. And after years of investing, the accumulated capital (at least 50% of it) is automatically reinvested in an annuity, which costs another 4-5% in initial charges.
Open-end pension funds are also inflexible. Once you enter, you cannot switch to a competitor,even if you discover the money manager is poor.
You have to stay in the fund for at least three years (five from its origin), and you cannot withdraw your money until retirement, or if you become unemployed.
Subsequently, experts say it will take a long time before these pension funds become popular.
On one hand, the average consumer will probably only invest their tax-deductible amount, and on the whole the more flexible and simple unit trusts may be more popular.
On the other hand the unit trust providers don't see this business as very lucrative.
Each customer requires a substantial effort to be captured, which is a costly labour intensive effort.
Also market development requires relatively substantial initial investment, and payback time can take five to seven years.
Will the Italian pension fund authority become more powerful or will it be wiped out? The Italian government's intentions are really not clear, with the Senate recently approving a proposal to increase autonomy and resources (first of all this means hiring skilled professionals) for Covip (Commissione di vigilanza sui fondi pensione).
However, the Chamber of Deputies is discussing whether to leave Covip in its current underfunded state, with few staff and little independence from the Ministry of Labour. The latter idea is supported by Franco Bassanini, a member of the Premier's staff, who wants to cut the number of Italian Authorities, which he says are too numerous and overlap.
Covip’s role may be in the end be switched to the Banca d’Italia (the central bank) or to Consob (the financial market Authority). Maria Teresa Cometto

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