Make no mistake about it. The Italians are deadly serious about developing their pension funds, adopting the latest and best from outside, but only after a thorough and rigorous analysis as to what they need and how it can serve their needs.
This message came through very clearly at the recent seminar in Rome, organised by Mefop, an Italian government sponsored foundation to help the development of the pension funds, to look at issues in performance measurement.
But this was not just a talking shop, but the culmination of a long exercise setting down the industry’s approach to performance issues, particularly the announcement that it had chosen Russell Mellon analytics as its partner to provide performance measurement reporting to Italian pension funds.
Pension funds will obtain an analysis of the performance and risk of their fund, relative to the benchmark and a peer group of other funds, as 90% plus of the existing Italian funds are involved in project, and the remainder are basically in agreement with the objectives.
The large contractual pension schemes, such as Cometa and Fonchim, who participated in the seminar, are the backbone of the initative. “They are the funds that need appropriate performance measurement and evaluation. Mefop and the pension funds have worked together to make the selection processes consistent and transparent,” says Mefop speaker Massimo De Felice.
The 15 funds actively supporting also agreed that when tendering for managers, they would give preference to those who were GIPS compliant by 2005. “This target is shared by the entire market,” he added.
Turning to the fund performance initiative, De Felice described this a very ambitious project for the market. “We felt it would be appropriate to involve a partner from organisations involved in both Italian and other markets. A working group was established including a number of the contractual funds and members of our scientific committee.” The decision was taken to outsource the operation, as the idea that Mefop could have developed a system in-house was not thought to be viable. “We then carried out selection process to identify a partner. This involved knocking on potential partners’ doors, providing them with a grid of our predetermined requirements,” he said.
Over half of those approached presented a proposal. “This was supportive, as it demonstrated they felt it would be worth while investing in the Italian second pillar.
A working group was set up that outlined the main principles on which the choice would be made. “We went through meticulous work to decide on scores which resulted in a short list of those who would be invited.” On the basis of this shortlist, the decision was taken to go with Russell Mellon.
“Now we cannot wait to get started, as we feel through this project we can achieve very remarkable results,” De Felice declared.
The project is an essential part of the role of Mefop, which is 70% owned by the Italian treasury ministry, with rest owned by pension funds. Set up in 1999 to promote the development of pensions in Italy, under the 1998 Financial Law, one of its objectives is to develop techniques and methods to assess the performance of those managing pension funds. The information from the collected data will be publicised by Mefop to ensure that there is transparency about pension funds’ activities and helping the drive towards efficiency in the market place.
Mefop president Marcello Messori, told IPE that the pension funds active in Mefop are the contractual funds, the open funds and the pre-existing pension funds. “The majority of the 30% is in the hands of the contractual pension funds, as they were the first to ask for Mefop’s services.” There are three main areas of service provision, the first being the financial area, of which the performance measurement project was very important.
“We are now addressing another very important topic that of the annuities,” says Messori. There is only one legal reference to the area, and most regard it as not a pressing problem, but he rejects this. “Within a few years it will be possible for some one in a fund to ask for an annuity.” Early next year a conference might be organised on this topic, he says.
Another area is that of “the normative evolution”, as the legal situation is continuously changing, with a new fiscal law some months ago, affecting the use of the TFR flows. “This is hard work!”
Training is another key function for Mefop “we now have six days of training on different topics every year.” It can involve training of the board of directors of pension funds, he adds
“We offer pension funds a service contract at a price,” says Messori. With that and the funding from the treasury ministry it is possible for Mefop to survive financially. The organisation also undertakes producing a number of publications, including a highly regarded statistical bulletin for the industry. “We produce two journals each year which are an attempt to analyse in depth some crucial topics.” At present Mefop numbers just seven people.
Mefop as a result of the project will be building up a database, Messori points out, just as the regulatory officials will be setting up some formal monitoring. “Why should the cost be doubled, why not utilise our data set in order to do the monitoring?”
The problem is that the assets of Italian pension funds are still very low, he recognises. The financial incentives for the pension funds development are too weak in his view. “In my view the binding constraint to the development of the Italian pension funds is that not the entire flow of TFR cannot go to contractual pension funds.” It remaines to be seen whether the new government would be able to tackle this problem.