The long-awaited revision of the law that regulates Italian pension fund investment has come into force.
After years of discussion, and delayed approval by Italian lawmakers, the ‘new 703’ is now a reality, allowing much greater investment freedom for the country’s second-pillar pension funds.
Paolo Pellegrini, deputy director of pension think tank Mefop, says: “We see it as the missing piece of regulation in a process that had already been initiated by Covip, the Italian pension fund regulator.”
Covip had begun to clear the ground for the new law at the end of 2012, by requiring that pension funds formalise their individual investment policies in an official document and set up internal investment teams.
The revised law removes quantitative regulatory limits to investment in almost all asset classes, moving from a prescriptive approach to a principles-based one.
Pellegrini adds: “The attention of the regulator shifted towards the ability of pension funds to manage and monitor investments.
“Although some quantitative restrictions remain, funds can invest in whatever they want – so long as their investments match their approved policies, and they can demonstrate they can actually do the investment.”
In practice, funds that have adequate internal control structures and monitoring capabilities will be allowed to go beyond the traditional 60% fixed income, 40% equity portfolio allocation.
Covip figures showed that, at the end of 2013, half of overall pension fund assets were invested in domestic fixed income.
Corporate bonds were 11% and equities 16.1% of the assets, respectively, while mutual funds and real estate took up 12.5% and 3.4%.
Less than 2% was allocated to alternatives, and around 5% was in cash.
The previous version of the 703 law, approved in 1996, set strict quantitative limits on what assets Italian second-pillar funds could invest in, including limitations on investment outside OECD countries.
Among the freedoms granted under the new 703, investment in mutual funds and OTC derivatives is permitted, as is investment in listed and non-listed non-OECD assets.
However, short-selling remains prohibited, and funds will be required to allocate a minimum of 70% of assets to listed instruments.
Investment in closed funds and alternative funds will be limited to 20% and 25% of funds’ assets, respectively.
Regulatory control over portfolios for second-pillar funds will be articulated in three levels.
On the first level, the custodian bank alerts regulators when funds fail to meet the few restrictions still in force.
Second, funds will be required to comply with the official document that sets out their investment policy, which the vast majority of pension funds have approved over the past two years.
Finally, Covip will continue to ensure that official figures submitted by pension funds monthly, quarterly and annually match their investment policies.
Pellegrini pointed out that the approval of the new law will make way for a similar piece of regulation for casse di previdenza, Italy’s first-pillar funds for professionals.
Historically, casse di previdenza have had greater freedom on investment and have been known, at times, to invest in risky and illiquid assets.
One example is Enpam, the €15bn pension fund for doctors, which built up an exposure to Lehman Brothers CDOs prior to the crisis.
The fund underwent a complex process of restructuring of the investment to make up for the significant loss in value.
However, Enpam announced today that the eight CDO papers, which now represent 4% of the fund’s portfolio, had recouped their full value, including restructuring costs.
The allocation is now worth around €750m.
Alberto Oliveti, Enpam’s chairman, said the fund would “never again” invest in derivatives.
“These investments have proved to be an unsuitable product for a pension provider,” he said.
“Today, we are satisfied we have been able to secure this portion of investments, which many had declared to be lost.
“We refused to sell them and continued to manage them in the interest of our members, until we were able to make a profit from them.”
Enpam said it expected the CDOs would be reimbursed or sold by 2017.