Consultants standing at threshold
Changes to Italy’s pensions law should result in billions of euros flowing into supplementary schemes from 2008. In the run up to the deadline, consultants are gearing up for more demand for their services – because someone will have to teach employees about the choice they are about to face.
The pensions industry in Italy has been going through a series of changes and more are on the way in January 2008 when the pension reform for supplementary retirement schemes kicks in, says Livio Mocenigo, head of employee benefits practice at Watson Wyatt Italia in Milan.
“The whole market is getting much more competitive and increasing in size every year,” says Andrea Canavesio, consultant at MangustaRisk in Rome.
The long-awaited reform for supplementary retirement schemes and the reform of the trattamento di fine rapporto (TFR) system - the system of severance pay - is now set to be implemented on the first of January 2008.
The fact that the TFR reform has been delayed and will now not happen for another year and half means that from a consulting point of view, there is not a huge involvement at this stage, says Piero Marchettini, managing partner at Adelaide Consulting.
“Except that during this period it will be very useful if the employees are educated about this,” he says. Pointing out that the transfer of TFR is still discretionary, he says there is a danger that employees who are not convinced of the urgency of it will simply leave their severance pay with the employer.
“In order to avoid that, it is very important to give good reasons, explaining things to employees, convincing them that there is an urgent need to transfer to supplementary pensions,” says Marchettini.
Workers can either transfer the money into statutory or industry pension funds, usually run by unions and employers, or into the open funds offered by asset managers, or into insurance contracts. Marchettini says he believes companies do have an interest in motivating staff to transfer severance pay out of the company, because in the future, there could be pressure on the companies to increase their contribution levels.
So far, there has not been much pressure for companies to do this, partly because staff who are close to retirement are still well provided for under the social security pension system. “But the young do not have a clear idea of how low their social security pensions will be,” he says.
“Employees will start to ask for more reasonable contribution levels,” says Marchettini. They could call for contribution levels to rise to 5% from their current levels of between 1% and 2%, he predicts.
The pension providers and insurers hoping to get a slice of the TFR are getting ready for competition. “They (employees) will decide primarily based on returns, so it’s creating a pretty competitive environment at the moment… and one where everyone understands communication is going to be very important,” says Canavesio.
However, though the overall idea is to
use TFR as the major source of funding company-sponsored pension plans in free competition between the asset managers, Guido Blasco of Hewitt Associates in Milan has doubts about how free the market will really be.
“There is still a huge resistance in having a real market competition,” he says. The sector funds - Cometa, Previndai, etc - want to be the preferred choice, and unions and employers’ associations are generally supportive of this preference. “So a real free competing market continues to be a just a dream, nothing more,” he says.
And at the moment, there is little choice or opportunity for much activity in the pensions industry in Italy. “Due to the limitations on the pension fund market,” says Blasco, “companies must use the funds established by the applicable national collective labour agreements or by company-sponsored pension funds, the room for rich activity is limited.”
With the exception of financial companies, which do not have a sector pension fund, most of the other sectors have one and must use it. The defined benefit residual pension plans may be an area where consultancy could be required, but these are becoming increasingly rare, he says.
The consultancy business in Italy has tended to be dominated by lone experts such as university professors providing advice, says Canavesio. But information technology is now a very important part of consultancy, as is client focus. Good IT is necessary to calculate costs in portfolios, show the risks created by the liabilities, change asset allocation dynamically and adapt it to different market forces, he says.
MangustaRisk advises €20-25bn of assets, he says, which is around 30% of pension fund assets in Italy.
“The market has started to accept the role of consultants,” says Mocenigo, “although it is still a price-driven market where consultants are not often considered for the added value they may bring.” It is the fees they charge that potential clients spend more time thinking about.
Within investment consulting, institutional investors are beginning to appreciate how important a good governance process including manager reviews and monitoring really is for trustees, he says.
The new law will increase competition in the pensions arena, he says, and this should benefit scheme members. Employers will face the choice of financing retirement programmes through different types of vehicles – industry-wide pension funds, company-sponsored plans or multi-employer pension plans. At the moment, the sector, or closed industry-wide pension funds are usually chosen.
Broadly speaking, consultants in Italy can divide their clients into two groups. On the one hand there are the pre-existing company-sponsored plans and the open pension funds. Here consultants are used to advise on plan design, manager selection and communication. On the other hand, says Mocenigo, there are the closed pension funds, to whom consultants can offer investment advice.
Different types of pension fund may ask for different kinds of advice, but in general, there is still not enough focus on defining strategic asset allocation, says Canavesio. “A lot of the focus is on manager selection,” he says.
For defined benefit schemes, managing and controlling the risk deriving from the liabilities is becoming more important, he says.
The market is primarily project-based, says Mocenigo, so consultants are usually only retained for a specific piece of advice. “In some cases the client is happy to broaden the relationship but this is not the norm,” he says.
In Italy, most pensions consultancies are either local actuarial forms, which are quite traditional, or the local office of an international firm, says Blasco .
“If the client is the local subsidiary of a multinational, the international consulting firms tend to be preferred, for Italian companies local traditional companies tend to be preferred with obvious exceptions in a direction or the other,” he says. In Italy, Hewitt is mainly a benefits design consultant, with investment consulting mainly done out of its Swiss, French and UK offices, he says.