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Italian pension funds expect review of asset allocation if reforms implemented

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ITALY - The Italian pension fund Fondenergia - which is seeking to invest in alternative asset classes as part of its diversification plans - fears reforms proposed for 2013 could impact the implementation of its new allocation strategy.

Speaking at the sixth European Pension Fund congress in Frankfurt, Alessandro Stori, general manager of the €1bn fund, said it was difficult for young pension schemes in Italy's second pillar to diversify their portfolios due to the "uncertain" implementation of new regulations.

"Fondenergia currently invests one-third of its portfolio in equities and two-thirds in bonds," he said. "But, due to the financial instability in Europe, we are seeking to diversify more our investments to reduce our exposure to volatility risk."

First, the Italian pension scheme is seeking to diversify its fixed income portfolio by focusing on inflation-linked bonds.

In addition, Fondenergia - the pension fund for oil sector workers - also plans to diversify its global portfolio by targeting investments in alternative asset classes such as emerging markets, real estate, infrastructure and private equity.

However, the option of increasing the retirement rate by 10% from 2013 - as suggested by the previous government led by Silvio Berlusconi - could deeply impact second-pillar pension funds' asset allocation.

"In the 1990s, some reforms were implemented in the first pension pillar to push back the retirement age from 57 to 60, while the replacement rate was increased from around 75% of gross salary to 50-55%," Stori said.

"Pension schemes like ours were, therefore, prepared to complement 25% of the replacement rate, meaning we had to adjust our asset allocation to reach this goal."

But Fondenergia's new targets - which have been set at a 2.5% return plus inflation - could be impacted by the new reforms recently proposed by Berlusconi's former government to tackle Italy's growing deficit.

"This summer, the government introduced new measures to postpone the retirement age well into the 60s and to raise the retirement rate by 10%," Stori said.

"As a result, the retirement rate in the second pillar should be therefore reduced. Clearly, if this happens, our asset allocation will need to be reviewed once again."

Stori, who nonetheless welcomed the proposed measures, conceded it was still uncertain whether the new government led by Mario Monti would stick to the same regulation.

"The future around the new measures remains blurred," Stori said. "In that context, it is still difficult to set a proper allocation strategy, and we might need to wait until the new regulation finally gets implemented."

Finally, responding to the question of whether Italy would manage to surmount its financial problems and refinance its debt, Stori remained optimistic, arguing that his country was taking the right approach to help reduce its growing deficit.

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