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Impact Investing

IPE special report May 2018


Getting the money away

Italy’s part-privatised state electricity utility, the Ente Nazionale Per l'Energia Elettrica (Enel), operates two pension schemes – one for managers and the other for its employees. The arrangement has its advantages. The smaller white collar scheme has provided a ‘test bed’ for key changes to the larger blue collar scheme – in particular its transformation to a fund that offers investment choice.
Fondenel, a scheme for 840 Enel managers, switched from a defined benefit to a defined contribution (DC) scheme in 1998. It was one of the first of the contributory occupational schemes to appoint external fund managers. Initially it hired four – JP Morgan IM, Crédit Agricole Indosuez, Merrill Lynch IM and the joint venture between Mediolanum and State Street Global Advisors (SSgA).
However, a large tranche of executives – 460 out of 1,300 – who had reached retirement age left the scheme in 2001, reducing the size of the assets to E170m. As a result, the Fondenel board decided it needed only two managers. After a beauty parade in which the four existing managers were invited to take part, Fondenel appointed Mellon Global Investment/Newton IM and San Paolo-IMI Institutional AM in April this year.
The following month, Fopen, the DC scheme for 54,000 Enel employees, which was set up in 2000, appointed its own fund managers: two international managers – Axa Investment Management and Mediolanum State Street, a joint venture between SSgA and Mediolanum which is now being broken up – and three domestic managers – Nextra IM, (formed from a merger in January between Comit AM and Intesa AM), Generali AM and San Paolo IMI AM.
Although the mandates are, in theory, actively managed, the wafer thin margins make this difficult in practice, says Stefano Pighini, holdings finance manager at Enel, and the executive responsible for financial management of the two funds. “The Italian banks were very aggressive in submitting their bids. The average remuneration of what is described on paper as an active management of the fund is a few basis points – less than 20 basis points on average. The result is that normally it’s a passive management.”
Fondenel was quick to introduce investment choice, moving rapidly from a ‘monocomparto’ fund, offering pension fund members a single choice of investment, to a ‘multicomparto’ fund offering several. This happened within 18 months of starting operation. The new pension funds are not expected to make the switch for a minimum of three years, to build up sufficient assets for multicomparto investment.
The Fondenel scheme currently has four lines of investment – a money fund, fully invested in short term paper, a bond fund invested 80% in bonds and 20% in equities, a balanced fund, equally invested in bonds and equities and an equities funds invested at least 70% in equities.
“Fondenel’s move to multicomparto has provided us with some useful experience,” says Pighini. “Although it was a defined contribution scheme like Fopen it did not come fully under Law 124 (the law regulating the new second pillar contributory pension schemes). That meant it was able to pass fully from monocomparto into multicomparto in September 1999.”

However, Fopen’s transfer will be far more complex. Fopen was established as one of the new ‘contrattuali e negoziali’ complementary occupational pension funds. As such, it comes under the aegis of the Commissione di Vigilanza sui Fondi Pensione (Covip), the regulator set up specifically to regulate the new funds.
Italy is one of the few European countries whose regulators vet occupational pension funds’ choice of the fund managers (although this system is currently being reformed). Covip’s authorisation process is notoriously complex and lengthy. Fopen chose its fund managers in September last year but was unable to give them their portfolios until May.
Pighini says the authorisation process is tortuous: “We have to publish a request for proposals for financial managers in the press, receive the offers, analyse them according to a scheme that has already been presented to Covip, choose one or more manager , and submit a contract that has been previously submitted to Covip. Covip then takes 90 days to approve the way a contract is settled. Only after the approval of Covip can you sign the contract and give the money to the managers.”
In the interim period, pension funds like Fopen are compelled to manage their money in the only way that Covip approves – that is ‘pronti contro termine’. Under this arrangement the assets are managed like a short term bank overdraft. The bank sells the pension scheme a certain amount of securities, domestic or international. At the same time it agrees to buy back the same quantity of securities after a fixed period at a prearranged price. The scheme earns a return on the difference between the value of securities at term and what it cost to buy them initially.
“Even there we had problems,” Pighini says “Because of possible conflicts of interest we should have had overdrafts with a bank other than our depositary bank, but in reality we were not able to open accounts with banks other than the depositary bank.”
Once Covip gives its approval, the pension fund board passes the management of the assets over to the managers. At this point it relinquishes all control of the day to day running of the assets, says Pighini. “A peculiarity exists in the fact that the pension fund board has the right only to define the asset allocation, and define the benchmark. Once the board gives the money to the financial manager, it has no further say about how the funds are managed.”
This has caused problems in the current market, where negative returns have become the norm, he says. “The financial manager will work according to the written contract, trying to do better than the benchmark but not taking any additional risk. And this is one of the limitations of the system because if the equity benchmark is losing up to 20% or more a year, and the manager loses only 19%, he thinks he’s doing well. There is no concept of total return.”
On the brighter side Pighini says assets are growing fast, justifying the choice of five managers to manage Fopen’s assets. “We think it will reach E500m before there is a significant outflow as pensions are paid out.”
Following the appointment of the managers in May, the Fopen board decided to move immediately from a monocomparto system to multicomparto. This requires a change in one of the statutory by-laws regulating Fopen, a change which must be approved by Covip.
“Very detailed questions are asked before approval is given,” says Pighini. “This is because the view of the commission is that in the multicomparto each line of investment is like a mutual fund itself, and when the pension fund member makes his choice he has to know everything as if he were subscribing to a mutual fund.
“We have to state what the maximum of equities and bonds there are in each line of investment, how the expenses are apportioned to each line, and what is the minimum period for the management of each line of investment before the pension scheme can ask for a change of manager.”
Fopen plans to introduce a scheme similar to the multicomparto scheme of the Fonchim pension fund, which received Covip’s approval in August. Pighini thinks that Fonchim’s multicomparto arrangement – one aggressive fund, one balanced and one safe – will act as model for other pension funds. “Other funds will have to more or less follow this in order to get approval from the commission,” he suggests.
Fopen made its first submission to Covip in May and has yet to receive a go-ahead.
Last month, Covip told Enel that it had set back the deadline for approval to 9 December Fopen’s board has now decided to push ahead with one of the three options – the zero risk option.
Pighini says the key to the success of investment choice will be the creation of a Fopen website. This job is likely to be given to Previnet, a service provider owned jointly by IntesaBCI, Generali and Unipol that already provides fund accounting administration services for both Fondenel and Fopen.
“Using the internet will be important because it will enable us to advise members on making the right investment choice,” he says.

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