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Consultant slams Italian reforms

Fennell Betson reports from the Fifth European Institutional Asset Management conference in Milan

The assumption that the state pension changes introduced in Italy by the Prodi government were sufficient was challenged by Giovanni Palladino of pensions consultants Motiv-Azione, at the European Institutional Asset Management conference in Milan last month, organised by Cadogan International and IPE.

Despite the government's belief that it had done a great job" in re-forming the system, he said: "The IMF, Bank of Italy and most economists believe that the reforms will not be able to reduce substantially the pension expenditure and the welfare deficit."

The future pensions of those not caught by the reforms have still to come through, with new retirees in 1998 getting on average more than twice those to workers paid before the 1990s, he pointed out. The increase in social security contributions to 33% of wages has led to the black economy, with a slowing in the growth of pension contributions to the system. "The baby boomers avalanche will soon arrive and is likely not to find enough employees to finance the bill."

He added: "Italian pension funds will have a great future as soon as parliament will approve further cuts to state pension benefits." The market potential of Italian pensions is limited until the unfair competition from the state pensions stops. "This year state contributions will cost $150bn,which is 33% of US social security contributions. These are covering - not at a loss as in Italy - 145m workers, as against our 20.4m workers, equal to 14% of the US figure."

Institutional clients will increasingly look for asset managers who can demonstrate they have in place convincing business management pro-cesses, John Casey of US consultants Barra Rogers Casey told the conference.

In what he referred to as a transition from investment to business risk fo-cus by clients, he said: "Buyers' ex-pectations will extend beyond invest-ment requirements. They will look for well managed asset management companies with strong commitment to risk management."

In a future environment with lower returns likely, managers must have transparent investment processes. Rigorous confirmation of each pro-cess for added value would also be required from managers. As institutional asset management moved into its second generation phase, he said that product development and enhancement would be at the heart of successful organisations. But he warned against putting products into the market as the solution to every situation.

The good news for the European pensions market could be at the third pillar level to supplement the failing first pillar, with the new funded products emerging in Germany and elsewhere, Adam Lessing of Goldman Sachs International said. "If this happens the European cross-border market in pensions could develop. Essentially, the draft directive creates the model, and the European states could create the necessary selling code for retail pensions." This could lead to a situation as in the US, where "defined contribution (DC) pensions has created a market which is a cross between institutions and individuals worth $1.2trn in mutual funds in the retail market."

This has entirely reshaped the US investment industry. In Europe under the pressure of the 'pensions timebomb', these DC plans would devel-op. Asset managers would look to manage those plans for the 'instividual market' and as a result the structure of the industry would be changed, he predicted.

The new EC directive on pensions and the mobility of labour was only a modest start, Axel Oxter of the EC's DGXV in Brussels told the conference. "But without the tax aspects it is seriously weakened. Future work had has to focus on the co-ordination of vesting periods and portability of pension rights."

He was hopeful that solutions on mobility issues could be found on a step by step basis. "The establishment of a pensions forum that could tackle the main problems might be a useful approach."

Oxter said the EC was just at the beginning of the pensions harmonisation process, with a large number of technical issues to be solved before a level playing field was achieved. "As regards the security of pensions, a question of major importance is whether there is a need for the establishment of pensions insurance, similar to the Pensions Benefit Guarantee Corporation in the US, or the PSV in Germany.""

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