Italy: In demand
New regulation is set to spur demand for consultants and custodians, according to Rachel Fixsen
The overhaul of state pension benefits in Italy and the new regulation to make pension funds more open about their investment strategies are just some of the things keeping the country’s pension consultants fully occupied.
Not only are pension funds turning to external advisers to shoulder the extra administrative burden, but also for the independent validation they provide.
New regulations from the regulator COVIP will lead to an increase in business not only for custodians, but also for pension consultants, according to Mauro Dognini, managing director of investor services in Italy at custodian RBC Investor Services Trust.
The rules, which took effect on 1 January 2013, state that pension boards will have to document their planned investment strategy and have it approved by the regulator.
They will have to give information on risk-return, analysis of liabilities, expected return and asset allocation, as well as detailing the associated controls and monitoring, including the duties and responsibilities of all involved.
That process will then have to be revisited and re-approved every three years.
“The pension funds will need to create internal structures to comply with the directive on investments,” Dognini says. “Some have already done this, some have yet to do it and others will decide to outsource this.”
New legislation for pension fund management is also on the way in Italy.
In particular, the 703 decree enacted in 1994 is being updated. It covers investment, stipulating which type of investments pension funds can use. The list will grow, allowing funds to invest in other asset classes.
Marco Fusco, head of southern Europe for State Street Global Advisors, sees the role of consultants expanding in the wake of the new 703 decree, as pension funds take the opportunity of moving into new asset classes – particularly the less liquid ones.
They are likely to turn to external advisers for help with this, and may decide to outsource their risk management and internal auditing, he says.
“The trend was to have one or two consultants, but now there’s a tendency for pension funds to have more, including specialists for each specialist area,” Fusco remarks.
In December 2011, the Italian pension system changed radically as part of the welfare reform led by Elsa Fornero, the welfare minister in Mario Monti’s technocrat government.
State pension coverage was drastically reduced in the reform, and communicating the implications of this remains a significant part of a consultant’s work, according to Claudio Pinna, managing director of Aon Hewitt in Italy.
“The context is completely different from the one we had in the past,” he explains. “Before the reforms that have taken place in the last 20 years, all employees received up to 80% of their final salary in state pension payments.”
The Fornero reform was based on increasing the retirement age significantly, and the introduction of the contribution method for calculation of final pension benefits, he says.
“Employees are aware that something has changed, because there has been a lot of discussion about the new context, but they don’t have a clear idea of the exact economic impact of the new reform,” he says.
The new method of calculation – which is partially based on the country’s future GDP – does not yet allow for an immediate pension projection for individuals.
“We need to create some kind of education for all employees to show from a personal perspective the coverage they can expect, and the amount of additional savings they need at retirement to cover their needs,” Pinna says.
Particularly in today’s low-interest environment, consultants in Italy – as elsewhere – play an important role in guiding pension funds on investment.
Diversification into asset classes other than equities and bonds is important for funds, says Alessandra Pasquoni, Towers Watson’s head of investment in Italy. “Italian institutional clients do have a lot of real estate already, and many hold direct real estate, so we wouldn’t advise increasing this, but we would advocate more diversification within that allocation,” she says.
This could involve looking for more opportunities outside Italy, and thus reducing the risk of concentration.
“Core infrastructure – investments with a stable cash flow that are linked to inflation – is quite an interesting opportunity because it can be replicated in the listed space,” she says, but cautions that it is necessary to find good managers to do this.
The same holds true for infrastructure investments, though it is important that pension funds distinguish between core and opportunistic managers of infrastructure to find exposure that meets their needs.
“Very often we may find managed infrastructure strategies are opportunistic, in addition to core, with the manager also seeking capital gain, and not simply stable cash flows and inflation protection, needed by pension funds to match their liabilities,” Pasquoni observes.
On the whole, Italian pension funds prefer to outsource functions to consultants where possible because it is expensive for them to form and maintain a full finance department, according to Andrea Canavesio, partner at consultancy Mangusta Risk. “They have to invest in the structure in order to have this, but this is seen as a cost rather than an investment,” he notes.
A fund would need to add staff, software and premises, which could lead to annual running costs of around €600,000 a year to be added to the balance sheet, he says.
Apart from the quality of the services they provide, Canavesio says pension funds value consultants for their independence.
“Where risk management is concerned, a second opinion is very important, so the independence of the company is crucial,” he adds.
However, not all pensions services companies in the Italian market are independent, even if they claim to be so, he cautions.
“There are some so-called consultancies that are paid by asset managers to sell their products in the market; in some cases this is done quite transparently. It is up to pension clients to evaluate that,” he says.
Pinna observes a certain failure among pension fund managers in Italy to grasp the problem of conflicts of interest.
“Consultants give advice to managers on products, and at the same time provide advice to pension funds on product selection – obviously this is a clear conflict of interest,” he says.
“At the same time, people request advice from banks and unions rather than from consultants, even though these organisations have other vested interests and are not independent,” he says. Pension clients’ desire for truly impartial advice is a point in favour of international rather than local advisers, Pinna believes.
“The impression in the market is that there are stricter governance processes; they are listed on a US stock exchange, so have to comply with certain standards, and also have an internal code of conduct,” he says.
On the other hand, it is not always easy for these international consultancies immediately to understand the Italian context, he adds.
Pension consultants in Italy need to provide a high-quality service that addresses all aspects of pension fund operations, according to Roberto Veronico, the new leader of retirement at Mercer in Italy. “Advisers should have the capability to analyse all the requirements that are determined by the liability structure of the pension fund, and the consultancy should have strong actuarial skills and be able to advise on asset management,” he adds.
Veronico sees the role of local adviser becoming more and more relegated in activities such as reporting and performance monitoring. “It will be the biggest international consultancies who advise more on strategy,” he says. “The reason for this is the complexity in the financial markets and the legislation pension funds are having to deal with.”