Less is more
The new head of the Covip supervisor has taken office with a lively agenda. Maria Teresa Cometto examines his new proposals
Antonio Finocchiaro, who took over as president of the Italian pension fund supervisor, the Commissione di Vigilanza sui Fondi Pensione (Covip), in January, came into the job with firm views. And he is not afraid to express them. "The size of Italian pension funds is unsatisfactory in relation to our country's needs," he told a Senate hearing in April.
He added that a major problem affecting specifically Italian pension funds was that there are just too many of them. Many are too small and so do not achieve an efficient scale. He urged a consolidation among open funds and the insurance-based individual savings plans, PIPs, of which are hundreds.
There are more than 600 pension funds in Italy, including not only industry-wide ‘closed' funds and ‘open' multi-corporate pension funds sponsored by insurance companies or banks, and PIPs, but also the so-called pre-existing funds that pre-date the 1993 reform legislation, which are still important in the banking sector and manage €36bn, or more than half of the total pension assets.
Finocchiaro followed up his Senate testimony with an article in the authoritative local financial newspaper Il Sole 24 Ore.
His views drew widespread comment. Mauro Marè, chairman of the Company for the Development of Italian Pension Funds Market (Mefop), an agency created 10 years ago by the Italian Treasury to promote and develop the pension fund market, responded that such consolidation could not be compulsory but that perhaps Covip could fix a maximum level of expenses chargeable to members and sponsors, above which a fund should merge with another.
Finocchiaro came to Covip from the central bank, Banca d'Italia, where he was deputy director general. For the last 10 years there he dealt mainly with its internal operations, most recently overseeing the redistribution of employees following the closure of some offices.
During his period at the bank he established a reputation for being a safe pair of hands. He succeeded Luigi Scimmia, who had headed Covip since 2004.
"Institutions should offer workers new personalised and detailed tools in order to get a precise idea of the future benefits that will be paid by the public system," Finocchiaro told the Senate. He also said that Italy did not need a reform of the retirement system or structural changes to the industry, but rather a new institutional campaign to explain why employees needed pension funds. He called for the launch of a widespread financial education campaign on the importance of retirement savings, involving schools and colleges.
"It would be difficult to launch because an effective campaign must involve many other public institutions besides Covip," Finocchiaro later explained to IPE. "We have already contacted the education department, the whole of the cabinet and the central bank to discuss when we can together promote the new initiative in workplaces, schools and elsewhere. But it should also start with the right timing, when the economic situation allows it".
He is also calling for the revision of investment regulations. Although the conventional wisdom is that Italian pension funds are better positioned to face difficult financial markets than, for example, those in the UK or the US, because their portfolios are more conservative and less exposed to equities, Finocchiaro claims that investments limits could be modified. He notes that they were defined in 1996 and since then many new financial tools have been created.
"Current rules are based on quite rigid quantitative and qualitative criteria," he explains. "I hope there will be an orderly revision of investment limits and conflicts of interest, which are 13 years old. A new approach could emphasise the qualitative criteria while softening the quantitative ones. That could mean allowing investing in innovative products such as hedge funds, but without abandoning prudence and rigour. When dealing with retirement savings and deciding possible changes in pension funds' investment rules we must always be very cautious and never forget the general ‘prudent man' rule recommended by the EU."
Finocchiaro said he would like to introduce an element of solidarity to the pension fund system to protect workers from negative performances. "I mean offering more guarantees to workers who have invested some of their savings into a pension fund, and who then have to face downturns in financial markets or personal negative surprises such as invalidity or unemployment," he says. "These workers may not be able to complete their retirement plan and get the necessary benefits. I don't ask for a public guarantee. Solutions can be found within the pension funds' system without any public help: the same pension funds may include a guarantee or offer life-cycle investment options, which automatically adjust a fund's portfolio to its members' ageing, increasing the ‘safe' fixed-income portion while approaching retirement. In addition, the funds' sponsoring companies could take care of the problem with some extra money."
There is also a question of whether to allow workers to leave their ‘closed' industry-wide fund and switch to ‘open' funds, while retaining their employer's contribution, which is not currently possible.
Finocchiaro says that this is an issue for agreement between the trade unions and employers' associations. However, it has been welcomed by Marè, who says he thinks that it would also be a good idea to allow people to transfer from open funds to closed funds, which are usually less expensive and offer competitive returns. He claims that this would represent a real liberalisation.
Last, given the diversity of pensions vehicles, with each type requiring different instruments of analysis and specific regulatory controls, Finocchiaro has expressed the opinion that Covip, which has a staff of less than 70 people, itself needs additional resources. But this proposal will not be easy to fulfil in today's environment.