Cooperlavoro waits for the breakthrough
Cooperlavoro is the occupational pension fund for the employees of Italy’s production cooperatives, and one of the 42 pension funds set up by collective bargaining agreements between employers and trade unions - the ‘fondi pensione negoziali’.
It was set up in 2000 and since then has has built its membership from 5,000 to 17,000 members. This is around 7% of its potential membership and markedly lower than that of leading funds such as Fondenergia and Fonchim which have rates of 73% and 65% respectively.
The low membership reflects the difficulty of recruiting from this sector of the workforce, says Flavio Casetti, pension fund manager and director of the Cooperlavoro pension fund. “We don’t yet consider
it sufficient,” he says.
Cooperlavoro began to manage pension fund assets in September 2001. Since then its assets under management have grown eightfold from €13.5m to €105.4m by the end of October 2006.
It is one of 13 Italian contractual pension funds that have built up their assets sufficiently to be able to move from a ‘monocomparto’ to ‘multicomparto’ - that is, from a single choice to a multiple choice of risk profiles within the investment portfolio.
Monocomparto portfolios are balanced funds, with a typical allocation of 20% equities and 80% bonds. Moving to multicomparto means, effectively, adding two options to the existing monocomparto, one with a heavier allocation to equities and the other with a heavier allocation to bonds.
The age profile of the Cooperlavoro fund is predominantly middle-aged, with 60% of members aged between 40 and 54, 32% under 39, and just 8% over 55. The fund’s governing board devised benchmarks for three compartos, with different degrees of risk aversion, to match these age groups. They are: a ‘sicurezza’ or security comparto with a 5% allocation to equities, a 95% allocation to bonds and a guaranteed minimum return of 2%; a ‘bilanciato’ or balanced comparto with 25% allocated to equities and 75% to bonds; and a ‘dinamico’ or dynamic comparto with 50% in equities and 50% in bonds.
The equity benchmark for all three compartos is MSCI Europe, while the fixed income benchmark is JP Morgan GVB EMU one to three years duration for the security comparto and JP Morgan GVB EMU five to seven years duration for the balanced and dynamic compartos.
The move to multicomparto will benefit pension fund members in a number of ways, says Casetti. “Members can choose their compartos according to their propensity to risk, their working age, their length of time in the fund, their personal economic condition and their salary income. From our point of view, it also allows us to personalise the pension investment for members.”
Casetti adds: “We don’t advise our members about which comparto to choose but we do provide them with plenty of information so that they can make the choice that best suits their own circumstances.”
Members can choose only one comparto, but they can switch to another at a pre-determined period once a year, provided they have been in the former comparto for at least a year. If members do not choose a comparto, their contributions are paid to the bilanciato comparto, which acts as the ‘default’ option.
The evidence at Cooperlavoro, as with the other Italian contractual funds, is that most people prefer to remain in the monocomparto. “The balanced comparto is actually a continuation of the preceding monocomparto, and more than 90% of our members have confirmed their former choice,” says Casetti.
This preference is reflected in the allocation of assets between the three compartos. At the end of October, the balanced comparto had €97.4m in assets compared with €5.1m in the security comparto and €2.9m in the active comparto.
In Italy, the law does not allow either closed - that is, contractual - or open pension funds to manage their assets internally, and the funds’ governing boards must delegate asset management to external professionals such as banks, insurance companies, investment firms or asset managers.
Cooperlavoro uses six asset managers to run its compartos. The Verona-based Cattolica Assicurazioni manages the security comparto. Management of the balanced comparto is split between Italian, German and UK asset managers - Unipol, JP Morgan Asset Management, Dekabank, Deutsche Girozentrale and Schroders Italy. Milan-based Pioneer Investment Management manages the active comparto.
The six were selected in a beauty parade last year. “We made a public request for proposals and made a shortlist of 10 managers for a total of five mandates,” says Casetti. “From these, in accordance with the different features of our three compartos, we chose our portfolio managers.” There is nothing to prevent one manager managing more than one mandate, Casetti says, but he wants to cast his net more widely. “We prefer to have different managers for a better process of diversification,” he says.
Cooperlavoro retains Consulenza Istituzionale as its investment consultant, principally to check on managers’ performance. “We use consultants for control,” he says.
Investment rules are based on the overriding principle of safe and prudent management. These rules are laid down by Covip, the body responsible for the regulation of Italy’s complementary pension funds. There is a strong emphasis on diversification, although alternative investments, such as fund of hedge funds, real estate or commodities, are not permitted.
Asset managers may take as much risk as the mandates allow, says Casetti. “We clearly specify in the mandate all the terms of the management of the portfolio, such as the information ratio target, maximum level of tracking error, and the required credit rating of bonds.”
Investment performance has been mixed. Over the 61 weeks following the introduction of multicomparto, the balanced fund has outperformed the benchmark, returning 6.56% against the benchmark’s 5.99%. However it has underperformed annually returning 3.97% compared with the benchmark’s 4.1%.
In the same period, the security comparto has underperformed, returning 0.89% against the benchmark’s 3%, and 0.85% annually against the benchmark’s 2.2%. The dynamic comparto has also underperformed, returning 12.07% against the benchmark’s 12.64% and 7.5% annually compared with 7.86%.
Members’ interest in the performance of their pension fund investments is growing, Casetti says. “In Italy the occupational pension fund sector is still young and people are unfamiliar with its workings. But now interest in the fund’s performance, which is fully documented on our website, is increasing.”
In 2008, Cooperlavoro’s assets are likely to grow more rapidly with the addition of ‘trattamente di fine rapporto’ or TfR, the severance payments made to Italian employees. The 2004 pension reform provides for the diversion of the accruing the accruing payments to the private pension system on a no-objection or ‘silenzio assenso’ basis.
The TfR has two main components: the accruing TfR is 6.91% of the annual salary of a single worker while the stock of the TfR is revalued at an annual rate of 1.5% plus 75% of the increase in the consumer price index.
Cooperlavoro’s returns, like those of other contractual funds returns compare favourably with TfR returns. Between August 2005 and September 2006 the balanced and dynamic comparto returned 5.69% and 9.91% respectively compared with TfR’s return of 3.18%. The security comparto underperformed with a return of 0.63%, plus a 2% guarantee.
Over the longer term, the balanced comparto has achieved twice the returns of TfR, says Casetti. “Our fund, without being the best one, obtained in the first five years of activity between 2000 and 2005 a return of 27.92%, while the TfR realised 13.96%.in the same period.”
If members need persuading to allow their TfR payments to be diverted into the pension funds, these figures should go some way towards reassuring them.