Leader of the pack
Nina Röhrbein spoke with Giorgio Valzolgher (pictured), managing director at Laborfonds, the not-for-profit pension fund that any employee in Italy’s Trentino-South Tyrol region can join
Laborfonds is a complementary occupational pension fund aimed at employees working in Trentino-South Tyrol, the most northern region of Italy.
In contrast to most pension funds in Italy, which typically only cover one sector of work, all of the region’s employees can join this multi-employer scheme, regardless of whether they are private or public sector employees. Members can also enrol their children or other tax-dependent family members such as spouses.
The not-for-profit fund was created by the region’s social partners - the trade unions and employer associations - in 2000 and is supported by the region’s PensPlan project, as occupational pensions are still in their infancy in Italy.
Laborfonds now covers more than 200 collective agreements, which also set the contributions for the fund.
Members of the defined contribution fund can choose between four investments lines with different horizons and portfolio compositions.
The employees select their investment line upon joining but can switch after year of investing in a particular line at no extra cost. On retirement at least 50% of the capital is converted into annuities, whereas the remaining capital can be paid out as a lump sum.
Prior to retirement, a member can apply for premature payout under certain conditions - for example, for property purchases or healthcare expenses.
So far, members, upon retirement, have always opted for a complete one-off lump sum payment, which is a possibility when the accumulated capital does not exceed a certain amount.
At present, around 80% of all of Laborfonds’ members are invested in the balanced line, which can be attributed to the fact that Laborfonds started out with this line in 2000, only adding the other three lines in the spring of 2008.
“Upon their introduction, all members had the chance to switch lines but only a handful decided to do so,” says Giorgio Valzolgher, managing director at Laborfonds. “However, due to the educational work we have undertaken in this area, the number of members that changed investment lines has, at 20%, been much higher than that of other Italian pension funds where the figure typically stands at 3-4%.”
Italian law requires the default line to be a guaranteed one. In reference to investments, decree 703/96 does not allow Italian pension funds set up after the 1993 reform to invest to a large extent in emerging markets, which is why Laborfonds’ exposure to them as well as alternatives is either minimal or non-existent.
“If it becomes possible to invest in other asset classes one day we will evaluate those opportunities for diversification purposes,” says Valzolgher. “The problem is that pension funds are disadvantaged compared to other forms of savings because more restrictions are currently imposed on them. Three years ago, the decree was meant to be changed and discussions had already made it as far as parliament but when the financial crisis struck, the debate fizzled out. However, the issue has recently been taken up again.”
The balanced investment line is split between 60% passive and 40% active investments but it is the active manager who is responsible for the overall portfolio risk overlay with regard to equity, currency and duration.
This has not always been the case. In 2008, Laborfonds started to review its balanced line investment model, which at the time employed six external managers, each specialised by asset class. The main issue with the structure was the perceived lack of overall risk management and investment overview at the total portfolio level. “The six asset managers for the balanced line each had their own active mandates,” says Valzolgher. “This meant that when one asset manager, for example, applied short duration to his mandate it was possible for the other managers to apply a longer duration, which offset the overall effect and resulted in an undesired neutral duration positioning at the portfolio level.”
In June 2009, the board of directors approved the new investment model for the balanced line. This reduced the number of employed managers to just two. The passive manager, targeting the same benchmark of the balanced line with a very tight tracking error limit, would provide beta exposure and market returns for 60% of the line’s assets. The active manager would directly manage 40% of the assets, but with higher tracking error limits and very high flexibility in terms of asset allocation ranges. The rationale was to provide the active manager with enough flexibility to both create alpha and tactically manage the risk exposure at the entire portfolio level.
The tender was published in October 2009 and in December 2009, BlackRock and Eurizon Capital were appointed active and passive manager, respectively. The new investment model launched in April 2010.
“In addition to the management of the active portfolio, the active manager can under or overweight equities, determine the duration and control the currency risk
in the overall balanced line portfolio,” explains Valzolgher. “In order to carry out this activity in an efficient and structured way, three risk overlay programmes were established.”
The equity risk overlay is managed using BlackRock’s proprietary models and strategies with the objective of protecting the overall balanced line portfolio from material losses during periods of extremely risk-adverse scenarios. A risk committee decides when to activate and deactivate the overlay.
When the active manager decides that the current duration of the balanced line is not appropriate, he can send an instruction to the passive manager and modify the benchmark of the passive portfolio - in other words, choose from a set of pre-approved benchmarks, so that the duration of the overall balanced line portfolio is aligned with his duration view. However, the official benchmark of the overall balanced line remains unchanged and the responsibility for any additional tracking error generated by this move remains with the active manager. The active manager also monitors the currency exposure of the balanced line and decides how much of the non-euro exposure needs to be hedged back, which is undertaken mainly through forward contracts.
“The new model aims to allow faster intervention in the pension fund’s risk management, as the active asset manager can quickly rebalance the overall market risks,” says Valzolgher.
In the guaranteed investment line, insurer Ugf Assicurazioni is responsible for risk management and the guarantee. Credit Suisse is the asset manager for the prudent, ethical line, while the dynamic line is managed directly and actively by BlackRock which has relatively large margins with regard to the different asset classes and can therefore actively over- or underweight.
“On top of the active asset manager we have a dedicated risk manager who undertakes the monitoring and reports back on a weekly basis,” says Valzolgher.
Laborfonds’ investment committee engages with the basic question of asset management. It comprises eight members, six of whom are selected from the 12-strong board of directors, the risk manager and the managing director of the fund.
Generally the board meets monthly, while the investment committee can meet more frequently, depending on the issues to be discussed.
All of Laborfonds’ employers and employees have a right to representation. To this end, employees and employers elect 60 delegates every three years who, in turn, appoint the board of directors and the board of auditors.
With almost half of all potential members - 245,000 - enrolled in its scheme, many of whom are over the age of 35, it is important for Laborfonds to convince employees to participate from a younger age. “Because the scheme does not have its own distribution network, the marketing strategy consists mainly of direct communication with current members and institutional partners.
“The more they know about the advantages of the fund, such as fiscal incentives, the more they will talk about it at work or with their families and friends, which should convince others to join when they enter the workforce,” says Valzolgher. “To increase the pension fund’s appeal we have to continue to generate good returns. Laborfonds is also currently involved in a project to extend its welfare services by offering, for example, reimbursement of health-related expenditures or long-term care insurance.”