Question of focus
Andrea Girardelli is operations director of Fonchim, the second largest of Italy’s 40 new complementary pension schemes for private sector employees.
Fonchim is a successful scheme by any measure. In seven years of operation it has recruited 115,00 members in 1,822 companies – 61% of its total potential membership and 66% of its core potential membership of chemical and pharmaceutical workers.
Assets under management have grown eightfold from E100m in 1997 to E800m at the end of 2003. Funds per member have grown from E1,498 in 1998 to E6,948.
Fonchim was the first fund to move from a monocomparto to multicomparto fund, with two additional lines of investment to the original balanced fund. The aim was to provide more investment choice to plan members.
Initially, members were provided with a single fund invested 70% in fixed income and 30% in equities. Girardelli explains: “The fund began as a monocomparto for two reasons. The first was that there was no money. The second was that our participants were not used to deciding how to handle their savings.
“And, after five or six years in this job, I would add a third reason – and one that we only found out when we moved to multicomparto. That is that people do not want to think about the financial aspects of their pensions when they come home in the evening.”
The evidence for this is the small number of people who switched from the original find to the new ones, he says. Fonchim members were offered two additional options to the existing fund – now re-named the Stabilita fund. One was an active fund, Crescita, invested 60% in equities and 40% in fixed income. The other was a cautious fund – Moneta – invested 100% in six month cash deposits.
“In October 2002 we sent a letter to everybody explaining what the multicomparto was and what it could do – not giving them a hint about what they should choose but simply showing them what they could have.”
In the event, only 200 people, 8% of Fonchim’s active membership, decided to switch: 2.5% went to the equities compartment and 5.5% went to the total cash compartment
“Basically, they decided to stay where they were, and they were in the balanced fund with 70% bonds and 30% equities,” Girardelli says. He adds that this is entirely consistent with the overall pattern of investment by mutual funds in Italy, where only 30% is invested in equities.
In spite of this, Girardelli says that Fonchim was right to move to multicomparto. “Multicomparto is a service, a service that you give to your participants, a service that they are entitled to have – because it’s important if they are 20 years old, their investments could reasonably be different from those that are 60 years old. People have the right to choose the kind of investment that they consider suitable for their savings. We have given them the choice between the car, the motorcycle and the bike. Which they choose is up to them.”
Girardelli says it is not the job of the fund to advise them: “It’s not my duty to educate the chemical workers. It is the duty of the state to communicate to the people that the second pillar in Italy is working. At least in Fonchim the second pillar is working. “
All three Fonchim funds outperformed their indices in 2003. Stabilita performed best, returning 7.33% compared with the Fideuram index’s 2.73% Crescita returned 8.78% against the benchmark 5.73% while Moneta returned 2.84% against the benchmark 1.93%.
Assets are managed by six asset managers Pioneer, San Paolo IMI, Duemme (Mediobanca and Mediolanum), Generali , RAS and Unipol Assicurazioni.
Fonchim has just has completed a search for additional managers. Last November it launched a request for proposal (RFP) for nine managers to run mandates of seven combinations of asset classes. Earlier this year it re-tendered five mandates – two balanced global, one balanced international equities and small-cap US and European equities – because of insufficient response to its first RFP.
“The Fonchim board made this decision because it wanted to try to add a bit of added value to the fund management of the pension fund,” says Girardelli. “Although the existing fund managers had added value compared to the benchmark, the board felt their performance was good but improvable. So what the board wanted was to try to improve the added value given by the fund managers.”
Girardelli says he is concerned that too much attention is focused on the fund’s investment strategy and not enough on other parts of the added value chain. “What is the business of a pension fund? Running money? Not exactly. In my opinion the core business of a pension fund is the relationship with your distribution and the relationship with your participants.
“Distribution is the most important part of the chain. At Fonchim we have free distribution of our product. It doesn’t cost a penny, because our distributors are the companies. We need to treat our distributors with respect. So the pension product must be simple and the way to handle it must be very clear. The people who distribute our pension are not financial specialists. They don’t work for a bank. They work for a chemical company in the personnel office.”
Building a relationship with plan members is also important. Fonchim’s financial muscle enables it to lend to members on favourable terms, says Girardelli: “Lending money is something that we can do that an open pension fund cannot do or can do less frequently. They charge proportionally to the assets. We charge a yearly participation fee which is not proportional to the assets.”
Most important of all is the speed with which Fonchim pays out what is owing to members when they leave the fund. “Some pension funds will take six months or more. My participants receive their money back within 45 days. That is why we are growing as a fund. Every month, we have more requests for participation than requests for reimbursement.”
Against this, financial performance is a far less important part of the value chain, Girardelli believes. “The fund must have a financial performance of course. But if I give people simple products I cannot give them outperformance. Only with sophisticated products I can give them significant financial performance.”
Girardelli uses a motoring metaphor to make his point “You can compare a pension fund to a good car. It’s not a Ferrari, but a Fiat – a good car, a cheap car, a car that will always run, with low gasoline consumption, a car that takes you wherever you want. You will never be the first to arrive but you will never be the last. And you will never crash. That is a pension fund.
“I am always telling our people that they are not saving for a pension to get rich. Somebody else may get rich with your pension. But that’s their job, not yours.”
Perhaps for this reason, Girardelli relishes the bargaining strength that the size of the Fonchim fund provides. “If you are a certain size you can have a different contractual power. When we go around to asset managers we are 115,000 people looking for someone to manage our money. So both for us and for asset managers it’s not a disadvantage keeping the prices low. We pay altogether on average 12 basis points per year.”
He adds with some satisfaction that only Calpers, the US pension behemoth, pays less.