Talks on reforming Italy's pension fund legislation to allow schemes to invest in a greater choice of asset classes have been going on for years. Nina Rohrbein reports

Italy's pension-fund market today almost exclusively consists of DC plans after the 1993 reform phased out DB schemes.

Industry-wide pension funds, open-ended pension funds and third-pillar individual pension funds are all DC schemes.

Overall, around 95% of the Italian pensions market is made up of DC schemes, while only 5% are DB plans, according to Andrea Scaffidi, retirement senior consultant at Tower Watson in Italy. But around 47% of the so-called pre-esistenti - the pre-existing pension funds founded before the 1993 reform - are either hybrids or DB schemes.

The pre-esistenti have 12% of the market's pension fund members, while industry-wide pension schemes boast over 2m participants, or 36% of the market. With regard to invested assets, though, the older pre-esistenti lead the field with around 49% of Italy's pension assets at the end of September 2011.

A large part of the contribution rates for the DC pension funds is established by the different labour unions through collective bargaining agreements. They vary hugely between pension schemes and are higher for employees of financial sectors and lower for other industries. Employees receive an employer contribution only if they make their own minimum contribution to the occupational pension fund.

The employee contribution of 1.2-1.5% of the gross yearly salary is generally matched by the employer. Another contribution comes from the annual severance pay, the trattamento di fine rapporto (TFR) - equal to around 7% of gross annual salary - which, unless employees opt out, will be paid into a pension fund, bringing the total average contribution to 9.5-10% of gross salary.

Since the TFR reform in 2007, companies with more than 50 employees have had to transfer the accrued TFR to industry-wide or collective pension funds. If an employee chooses to leave the TFR with his company, it means the company can transfer the TFR to a public pension fund through a mechanism similar to auto-enrolment. At present, employees have six months from starting a new job to decide whether they want to join a pension fund or not.

However, auto-enrolment has not had the desired effect in Italy, as many people opted out of pension funds, choosing to keep their TFR instead. According to Covip, at the end of 2010, only 23% of the workforce was enrolled in a pension fund. Personal insurance pension plans, which are mainly used by the self-employed, are more popular in Italy.
Italian legislation states that a pension fund has to offer a guaranteed line if it wants to receive the TFR of the employees automatically enrolled in the pension fund. The guaranteed line must provide the refund of the nominal contribution paid and a net return comparable with that of the TFR. The return of the TFR, which is prescribed by law, is 1.5% plus 75% of the inflation rate.

The pension funds currently manage these guarantees by buying them from external providers such as insurance companies. But potential new regulations could change the way benefits are paid. "Upon retirement, the current solution is to buy - through the pension fund - an annuity from an insurance company," says Scaffidi. "However, following the introduction of new mechanisms, the members could in future receive their annuity directly from the pension fund."

While all pension funds have to be compliant with the legislation and provisions of the regulator COVIP, every fund is free to establish its own mode of operation with regard to investment policies, risk management and organisation. But for transparency and disclosure purposes, Italian pension regulation also requires a high level of information to be given to employees, both before and after enrolment.

An important goal recently achieved in self-regulation, according to Luigi Ballanti, director at the Company for the Development of the Italian Pension Funds Market (MEFOP), deals with portability: employees can now switch between pension funds using a standard form and an agreed procedure, which is expected to reduce the time needed for such transfers.

Only one major pension fund offers a lifecycle strategy at present, meaning a large part of Italian pension fund members opt to invest the money in guaranteed or low-risk-profile funds and, in turn, receive low rates of return, according to Scaffidi.

This is also why around half the assets of industry-wide, open-ended, pre-esistenti and individual pension funds invest in public debt instruments. Another 10% are allocated to other debt instruments such as corporate fixed income products, while 28% are invested in equities, either directly or through UCITS III products.

According to MEFOP, fixed income represented 57% of all invested assets at the end of 2010 and of these, 80% were sovereign bonds, mainly Italian and other euro area sovereign bonds. Equities made up an average of 13.7% at the end of 2010.

Unlike the pension funds founded after the 1993 reform, the pre-esistenti are allowed to have an exposure to real estate. For new, open and closed pension funds, decree 703/96 limits the investment universe and prohibits exposure to alternatives. A change to the decree could allow investments in emerging markets, commodities, hedge funds, private equity and real estate but there is uncertainty about when this will happen, as talks about a reform have been going on for several years.

"Another review of the decree by the treasury is scheduled to take place in 2012," says Scaffidi. "With a new decree, pension funds would be able to invest in alternatives if members are at the same time able to switch portfolios, for example, from a guaranteed or low-risk-profile portfolio to a medium or high-risk-profile portfolio. Future best practice for pension funds would be for them to introduce the lifecycle approach, manage their annuities and other benefits directly and diversify their portfolios by introducing alternatives after a reform of decree 703/96."