Carlo Svaluto Moreolo outlines the disappointing membership figures in COVIP’s latest annual report, which overshadow a healthy 9% increase in overall pension AUM

There is a feeling of frustration surrounding the 2011 annual report of the Italian pension regulator. Aside from the dissapointed figures that were released, representatives of the pension industry are frustrated with the Italian government’s seemingly relaxed attitude towards reforming and improving the country’s second-pillar pension sector.

As the annual report of COVIP, the pension fund regulator, was released and presented in Rome on 23 May this year, it became clear that labour and welfare minister Elsa Fornero, after intervening in state provision, is in no great hurry to act on private pensions, which clearly lets down the hopes of the sector.

The figures show that at the end of 2011, 5.5m workers were enrolled in one of the three main types of private pension schemes that the Italian market provides, a mere 5% more than the previous year and only 24% of the total workforce.

This unexciting number hides a more worrisome - yet interesting - situation, as the 5% increase is split as follows: PIPs, independent private pension plans, have boomed, with a 25.2% increase in members during 2011. Second pillar open pension schemes (managed by private sector entities) have seen a 4% increase over the same period. However, with 2m workers, the once popular closed pension schemes (industry-wide and trade union-linked ones) saw a 0.8% decrease in membership.

This is because many workers have to deal with difficult employment situations - they may have lost their job or decided to unlock their money and use it for other financial needs. The decrease is also due to workers, yet to join their scheme, refusing to do so, as they fear that they may lose the money to the financial crisis. The report showed that many workers have asked for a portion of their TFR funds to be released.

The most worrying finding, however, is that around 20% of workers have stopped contributing to their schemes - a higher figure than 2010.

However, there was an increase in total assets under management. At the end of December 2011, the total assets of Italian pension schemes had increased to €90.7bn, a 9% increase from the previous year.

Filippo Battistini, head of institutional business for Italy at State Street Global Advisors, says: “The interruption of contributions is a negative phenomenon. It’s linked to the crisis - some people have begun using pension plans as bank accounts. They discontinue their contribution to use the funds to buy their first home, to pay for hospital bills, or without reason. It’s a serious matter, especially when compared to decrease in membership.”

In terms of general performance, the report painted a gloomy picture. Closed pension funds managed flat performance. Open pension funds, however, recorded a fall of -2.4% over 2011, while unit-linked PIPs decreased by -5.7%. A few managers may defend their performance in such a difficult financial market: PIPs have recorded positive performances. Of the €90.7bn AUM, 58% was invested in Italian and foreign treasury bonds, and the equity component of the global asset allocation was markedly smaller than at the end of 2010.

The problem is that, on average, pension funds fared worse than the 3.5% appreciation of the TFR (trattamento di fine rapporto), or severance pay, which workers can decide to collect at the end of their career rather than putting into a private scheme.

The TFR is generally used as a good barometer of the whole sector’s performance: if pension schemes did better than the TFR during the year, workers will think that keeping their money in a private pension scheme is worthwhile. Otherwise, they may perceive that investing for their future is not such a good idea.

This exquisitely cultural issue does not look likely to solve itself, and the government has no clear intention of investing in promoting the second-pillar system. Battistini says: “There is little sensitivity on these issues. It has to be pointed out that many workers are leaving institutional pension funds to switch to PIPs: but this way they relinquish the financial contribution of employers. This is a problem both for individual workers and for the system as a whole. The fiscal incentives to invest in private pension funds are there. There is a need for a far-reaching campaign. But the entities that set up pension schemes - representatives of employers and trade unions - do not have the means to implement an information campaign, and there are no specific responsibilities.”

Battistini’s opinion is shared across the industry. A yet to be released report by Assofondipensione, the association of trade union representatives of closed pension funds, claims that workers who have joined closed pension schemes have chosen to do so because they received detailed information both from employers and trade unions representatives. The hypothesis is confirmed by small companies, which the employers’ associations and trade union representatives barely reach, where workers have hardly joined pension schemes since the Dini pension reform.

Domenico Proietti, vice-president of Assofondipensione says: “The government is
failing to do what COVIP asked, which is a far-reaching information campaign on private pensions. In the meantime, newspapers highlight the negative performances of pension schemes - but fail to explain that pension investment is a long-term matter.”

Another issue highlighted by Antonio Finocchiaro, COVIP’s chairman, is the high number of schemes in the market, which prevents economies of scale. At the end of 2011, there were 545 schemes, 14 fewer than the year before, but still too many given their size: more than 400 schemes have fewer than 5,000 members, 300 schemes have fewer than 1,000 members and there are 180 with fewer than 100 members. Finocchiaro pointed out that in a small-sized pension scheme it is difficult to build good management and monitoring structures, which can keep the cost of investment high.

All these matters are much discussed, but without any action. The debate also gets somewhat heated when it comes to the 703 law, which regulates the limits to investment of pension schemes. COVIP and the government have stated that the 703 law will be reviewed, and a draft review is said to be ready to be discussed in parliament. However, it seems that the draft review has been sitting in someone’s office for a while.

Yet Battistini is hopeful: “Ahead of the review of the 703 law, COVIP has proposed to meet asset managers to discuss important issues on investment limits. I think this is an important novelty, and SSgA will happily participate if we are involved.”

Proietti of Assofondipensione outlines his opinion: “Assofondipensione is generally in favour of a review of the 703 law, as long as the difference between an investment tout court and pension investment is specified. The worker needs to understand the difference between the two.” Proietti suggests what many in Italy believe: that relaxing investment limits may not be beneficial to the sector, as managers of pension schemes may be attracted to risky investments that are not suitable for retirement purposes.
He adds: “The poor membership figures of the Italian pension sector may be because many workers perceive pension schemes as being investment schemes, and in this sense the difference between the two needs to be highlighted rather than blurred.”