The ENPAM pension fund for medical professionals made the headlines last year after concerned members alerted the press to alleged wrong-doing. Carlo Svaluto Moreolo sheds light on a matter that has seen the former chairman under investigation for fraud and which also raises questions about transparency and governance at some Italian pension schemes

The pension money of the almost 435,000 members of ENPAM, Italy’s €12.5bn pension scheme for medical doctors and dentists, appears to be in safe hands today. Since the 2008 crisis, ENPAM (Ente Nazionale di Previdenza e Assistenza dei Medici e degli Odontoiatri) has fared better in terms of performance than other similar institutions (casse di previdenza) in the country. The defined benefit fund says it now has a positive balance, according to the 2011 summary of consolidated financial results, which is in the course of being approved.

But for a 12-month period that began in May last year, the country’s doctors were gravely concerned about the conduct of the fund’s top management.

The ENPAM affair, which rocked the Italian pension sector this past year, leaves many questions yet unanswered, particularly concerning competition in the sector, the adequacy of the country’s legal framework for pension investment and, ultimately, the solidity of this part of the Italian pension system.

The story has its roots in the complex network of personal - and political - relationships that surrounds the Italian pension investment sector. When the news of it broke last year, it was not known whether it was merely a case of mismanagement of funds, partly due to inexperience and the misjudgment of risk, or even outright fraud.

Alarm bells started ringing in May 2011, when it was alleged that ENPAM had made losses of €400-500m through investments in complex financial instruments. The accusation came from five chairmen of local branches of the doctors’ professional association, who presented an official - and worrying - complaint about ENPAM to the Rome Public Prosecutor’s office and the parliamentary commission dealing with the private pension sector.

That statement, which has been reproduced in the Italian press, claimed that Eolo Parodi, the then 85-year-old chairman of ENPAM, had allegedly failed to disclose a report prepared by the consulting firm SRI Capital Advisers, dated May 2010, that exposed the board’s irresponsible management of ENPAM’s investments. Parodi, the statement alleged, had instead kept the report secret and only shared it with Mangusta Risk, the fund’s risk adviser, although Mangusta Risk maintains it did not have anything to do with the report after it reached Parodi’s desk.

Moreover, according to the statement, Parodi had sent a letter to SRI Capital Advisers asking the firm to modify the conclusions of the report, particularly those concerning the limited transparency of ENPAM in disclosing its balance sheet, and in failing to inform the board about the risk involved in the CDO investments. Parodi’s letter to SRI was mentioned in the doctors’ statement and was published by the Italian national media. The doctors’ statement did not elaborate on Parodi’s reasons for challenging the report. In his letter, Parodi did not mention Mangusta Risk, even though the risk adviser was clearly mentioned in the doctors’ statement.

In their statement, the group of doctors pointed out what they described as the worrisome picture painted by the SRI Capital Advisers report, which said that ENPAM had invested €446.5m in collateralised debt obligations (CDOs), losing 56-57% of the investment. ENPAM then had to renegotiate the terms for these instruments, spending a further €102.6m on restructuring, bringing the cost of the investment to €549.1m. The report estimated the fund had also lost around €85m in other non-CDO-type structured instruments that had gone wrong. However, ENPAM points out that these losses were never realised and the investments are now on course to show positive returns.

The doctors’ joint statement sparked a crossfire of allegations, which prompted the Rome public prosecutor’s office to open an investigation. Italian media reported that in October last year the ENPAM headquarters were searched extensively by men of the Guardia di Finanza (the Italian law enforcement agency for investigating possible financial crimes).

Parodi was officially notified in April this year that he was under investigation for fraud. Pressure mounted on the chairman to step down while anxiety spread among ENPAM’s members. The doctor and politician, who had been at the helm of ENPAM for two decades, voluntarily resigned the same month. ENPAM’s website contains a statement from Parodi in which he denies any wrongdoing.

Maurizio Dallocchio, who is a professor of economy and finance at the Bocconi University in Milan, and who had been an investment adviser of ENPAM for 17 years, is also under investigation, together with Leonardo Zongoli, general director and consultant of ENPAM until 2007 and Roberto Roseti, also responsible for the fund’s finances.
Again, they have not made any public comment on the situation and it must be assumed that they will also deny any wrongdoing.

The furore surrounding these events, however, began to peter out after Parodi’s resignation. The news that the 2011 ENPAM funding position will be positive is good for pensioners and future retirees. In fact, forecasts released by the fund claim that ENPAM is generating over €1bn in cash, and that the total assets under management of €12.5bn are a record figure.

The figures were issued ahead of the adoption of the balance sheet, and ENPAM has also added details on the potential risk of further losses stemming from structured products acquired in the past. The fund maintains that the capital put aside to cover these risks has shrunk from €296m in 2010 to €253m last year, showing a constant improvement after the 2008 crisis.

As a whole, since 2008, the fund has performed well. In the annus horribilis of the global financial markets ENPAM reported -5.63% performance, good in comparison with other funds in Europe, and it gained ground in later years with a 6.29% return in 2009 and 5.4% in 2010.

This should suffice to reassure members and lawmakers alike on the state of ENPAM. But the fund still owns hundreds of buildings around the country, some of which are in ruins, according to minutes of meetings of local doctor’s trade association branches. ENPAM, however, says it is negotiating debt payments from companies such as Atahotels, a hotel business that borrowed money from ENPAM but felt the full force of the crisis, causing it to delay payments to the fund.

Many interesting questions remain on why such allegations against ENPAM’s top management were made and what is to be learned from the scandal. Why for example would ex-chairman Eolo Parodi first request an analysis of the fund’s portfolio, to then express disagreement with its conclusions and ask that these be changed?

IPE posed the question to Giulio Gallazzi, London-based chairman and chief executive of SRI Capital Advisers. He said: “SRI Capital Advisers was appointed to conduct an analysis which we shared with the top management of ENPAM several times during the process, to highlight the elements that emerged. We were asked to identify the risk profiles of the fund’s assets. We fulfilled the request in due time, and subsequently we were asked to change the conclusions of our analysis. We refused to do that, on the basis of our independence as an organisation. Since then, I have never personally dealt with the conclusions of our analysis, I merely defended our work.

“ENPAM has said that they felt damaged by the conclusions we reached. As financial analysts we believe that the conclusions were objective. We analyse numbers and there is little scope for subjectivity. I simply defend the quality of our work and our independence - we are convinced of that analysis, we have signed it, and we could not change the conclusions only because we were asked to do so. We certainly did not ask the prosecutors to perform an inquiry.”

Gallazzi adds: “I only know the ENPAM issue and cannot comment on other similar institutions. The issue is very simple: the management of pension funds needs to be more professional and prudent. Large institutional investors have to equip themselves with technical and managerial competence of a much higher quality. They have to perform true strategic asset allocation and daily monitoring activity, not just in a formal fashion. These institutions manage assets with a specific objective in mind, which is providing pensions, and therefore have to do so with maximum prudence and transparency. The problem is not one of lack of resources; the problem is that these entities need to gradually stop being mainly a place of political and trade union representation, and more of a managed/technical environment. At the very least, there needs to be an adjustment in this direction.”

The media has speculated that the SRI Capital Report and the accusations that followed may have been made as a challenge to shake Eolo Parodi’s leadership of ENPAM. What seems clear is that Parodi’s detractors have tried to demonstrate that he has misjudged the riskiness of certain investments, paid his advisers too much, failed to disclose all information to the board, and possibly even falsified the funds’ accounts. However, it has to be pointed out that, in a year of investigations, the public prosecutor has yet to find any evidence for any of this. At the same time, of all the people involved in the matter, only Eolo Parodi, Maurizio Dallocchio, Leonardo Zongoli, and Roberto Roseti have ever been under investigation.

Within its report, SRI Capital Advisers also drew attention to the role of Mangusta Risk in the management of the fund’s portfolio. As well as paying Mangusta Risk €170,000 per year for its consulting services, the report claimed, the board of ENPAM approved the further payment of what could, depending on future performance, amount to a fee of as much as €6.4m to Mangusta Risk for the monitoring of the risk related to seven CDOs held in a special purpose vehicle.

Mangusta Risk has told IPE that it disputes this and when asked about compensation for the investment advisory work, Andrea Canavesio, partner at Mangusta Risk, explained the details of the fee structure as follows: “The hedge fund managers who were called in to work on the risk reduction programme were paid a 20 to 25 basis point running management fee. In terms of the performance fee, this was agreed to be 5%, calculated over a six-year period and paid at the end of the period only if all CDOs recoup at least 100% of the capital.”

Canavesio also outlined his firm’s relationship with ENPAM: “Mangusta Risk’s relationship with ENPAM, as was clarified to ENPAM’s new board, the prosecutor and ENPAM’s members, has never been [that] of investment adviser. We worked exclusively as risk monitoring advisers throughout the period. We were only given an advisory mandate following the great credit crisis of 2008, as the board asked us to help them reduce the credit risk in ENPAM’s portfolio. This was done promptly and successfully, as the overall risk of default of the CDO portfolio was reduced by over 70% and performance was over 60% at the end of the mandate.”

A ENPAM spokesperson clarified the position of the fund on the matter as follows to IPE: “The official position of ENPAM is that the organisation is the injured party. If there were to be charges, we would be the injured party in the trial.

“The accusations have been made to Dallocchio, Zangoli and Roseti, and obviously the ex-chairman Parodi, because the signature on each investment was his. He is the only elected member of the board of directors that is being investigated - Dallocchio was a ‘nominated’, not elected member of the board, and this is a governance practice that the fund has abandoned. ENPAM no longer appoints advisers as members of the board, as part of a new governance structure proposed by the new board with the help of Mario Monti.

“The definitive data that the investigation has found, after a second search that was performed on 17 April, is that there was a €400m fund that was allocated in 2008 to cover potential losses from the derivatives portfolio. This fund has been put in the balance sheet, however. ENPAM then made a restructuring of the derivatives portfolio, which in the worst moment of the crisis was down to 27% of the nominal amount. We tried to sell the CDOs but the banks were offering too little money, so we decided to restructure the portfolio. We extended Mangusta’s contract and selected two hedge funds specialised in credit risk to restructure the CDOs. We had to allocate €100m to conduct the operation. This restructuring, however, has already allowed us to recoup a good size of the investment. Most of the nine CDOs expire in 2017, the one CDO that expires in December this year is up 116%. That means we will recoup the capital and possibly make some return. It is not a brilliant investment, but it is definitely not a loss.

“There was a €400m ‘gap’ but we reduced it to €328m in the 2009 balance sheet, to €296m in the 2010 balance sheet, then €253m in 2011. The structured products that have been instead sold or have matured in 2011 have netted on average 1.6% per year. There was a lot of confusion on the figures. The €3bn figure relates to the whole structured products portfolio, of which CDOs were a small part, around 446 million.”

Another question is why was Mangusta Risk’s role in the affair seemingly exaggerated? It has been suggested that its leadership in the Italian market makes it an easy target for unfair accusations. While this cannot be proved, it suggests that the structure of the Italian market is far from ideal in terms of competition.

It is far from clear what lessons should be drawn from the ENPAM story. Domenico Proietti, vice president of Assofondipensione (the association of trade union representatives of closed pension funds) believes that institutions such as ENPAM should be regulated by the same 703 law that regulates other pension funds. He told IPE: “So long as the purpose of the investment is to earn a pension, the casse di previdenza should follow similar rules. ENPAM and other institutions shouldn’t see stricter controls by COVIP as a threat, they should instead see them as an opportunity to provide their members with further guarantees.”

The matter may or may not be judged in court. Meanwhile, bold promises of transparency in the disclosure of balance sheets have been made by the new ENPAM board and other casse di previdenza, and some have begun to share details of their balance sheets on the internet. ENPAM has also fulfilled the request of the government to extend its solvency from 20 to 50 years - meaning lower pensions and higher contributions. Other casse di previdenza have yet to do so.

However, the role of lawmakers, regulators and market actors, particularly advisers, in avoiding the issues ENPAM faced are not yet clear. The adoption of stricter regulations, hastily approved in response to the ENPAM case, which could further burden the market, may not be the right solution for these problems. The right way would be disentangling the network of political interests behind pension and financial investment that burdens Italy - which is, arguably, a lot more difficult to do.