Is the glass half empty or half full? The answer asset managers give to this question will determine the view they take of prospects for the Italian occupational pensions market.
Since they began operating seven years ago Italy’s new complementary pension funds for private sector employees have attracted E6.3bn in assets .
For the pessimists, this is a dispiritingly low level. They blame the lack of compulsion, the paucity of public education about the need for supplementary pensions and the recent squeeze on disposable income
For the optimists, however, the under-developed market represents an opportunity. The new round of requests for proposal (RFP) promises to widen the market. By law the new closed pension funds are required to make a RFP every three to five years.
The second round of RFPs is now under way. Last year, Fonchim, the first of Italy’s new closed sectoral pension funds, issued an RFP. More recently, Cometa, Italy’s largest complementary closed fund in terms of assets, issued an RFP for its entire assets – expected to reach E2bn by the end of the year.
This represents a large segment of the 42 closed pension funds’ total assets, estimated by Covip to total E4.5bn at the end of 2003.
Of more interest to international asset managers, perhaps, is the fact that Cometa has moved from a single line of investment – the ‘monocomparto’ offering a single balanced fund – to a multicomparto structure offering four different lines of investment. The move from monocomparto to multicomparto is expected to lead to more specialised mandates and open the door to a broader range of managers.
Not only are existing assets open to competition, but future assets are likely to grow. The pension reform bill, currently making its way through parliament, is expected to swell the assets of the complementary pension fund assets substantially. Covip, the regulator of the complementary funds, estimates that this will add E13bn a year.
Among its provisions, the new law will authorise the automatic payment of the end of service allowance – trattamento di fine rapporto (Tfr) – into the new pension. The Tfr is a significant feature of the Italian social security system. It involves setting aside a portion of a worker’s pay, which is then paid as a lump sum at the end of the employment relationship
Under the new law, employees enrolled in a complementary pension fund who were employed after 28 April 1993 will have their entire Tfr contribution – about 8% of salary – allocated to a complementary pension fund. Employees who started work before that date will have only a portion of the Tfr allocated to the fund.
The transfer, like membership of the complementary scheme, is voluntary. But the Italian government is determined to make it work. If employees do not say no to the transfer, their silence – the ‘silenzio assenso’ – will be taken as agreement.
An employee can choose whether the Tfr contribution is paid into a closed pension fund or an open pension fund. Closed funds are set up by collective agreement and restricted to workers in a particular sector. Open funds are promoted by institutions allowed to operate pension funds and are intended mainly for self-employed workers and professionals.
Whether Italians will opt in or out of the Tfr transfer remains to be seen. However, San Paolo IMI Asset Management has assumed in its estimates of future TFR assets that a majority – 55% – of those eligible will participate via the ‘silenzio assenso.’
Asset managers sense a growing awareness among Italians of the need to save for retirement, Alessandro Gandolfi, the executive responsible for occupational pensions at San Paolo IMI Asset Management, believes that there has been a ‘Copernican’ revolution in the way Italians regard pensions and pensions savings:
“There is a new understanding of the Italian people of retirement needs. Two or three years ago this was not an issue. People did not think about pensions but simply how to invest their money, which is something different. Now people are starting to think how to finance their future pension. The real revolution in thinking is bottom up not top down. It is coming from people themselves rather than from the new pension reform law.”
For this reason, the pensions market offers the best opportunity to asset management houses in Italy. Massimo Greco, managing director of JP Morgan Fleming Asset Management in Milan, says: “If the institutional market is ever going to be worth anything in Italy, it will be because of pensions. The rest of the institutional market is not particularly large or promising. In particular it doesn’t have any growth potential above the rate of inflation.”
The pensions market in Italy is currently dominated, in terms of assets, by the so-called pre-existing funds. These are pension funds that were in existence before the Lamberto Dini pension reforms of 1993. Their total assets under management are just under E30bn, compared with the assets of the new closed and open pension funds, which total E6.7bn.
Yet until recently their assets have been effectively closed to asset managers. Most of the funds are operated by banks and insurers, who do their own asset management. The funds are also largely managed by insurers rather than asset managers.
This situation may be changing. Two major banking groups, Cariplo - now part of Intesa – and Unicredito Italiano, have already gone outside their groups to find external managers for their pension funds, and others seem likely to follow.
Stefano Kihlgren, head of institutional marketing at Ras Asset Management, the second largest manager of pre-existing pension fund assets, says the trend is well-established: “We see a definite movement towards an increase in the use of external managers. Several of the major pension funds of the leading banks in Italy are moving towards external management, and even towards a fund of funds structure.
“We also see that some of the pre-existing funds are moving away from insurance products and towards financial products.”
Foreign asset managers, who tend to be excluded from mandates by the new closed and open pension funds, could pick up business from the pre-existing funds. Fabrizio Gualco, director responsible for pensions business at Credit Suisse Asset Management in Milan, suggests that the pre-existing funds will be more likely to choose foreign asset management houses as external managers.
“As far as the pre-existing funds are concerned, I think there will be more room for international players. The banking pension funds in particular will prefer to have a foreign manager as an external manager because they will not want to go to a local competitor.”
Yet under the existing system of manager selection, there is no certainty that foreign managers will be considered. Selection procedures in the pre-existing pension fund market are notoriously opaque. There is currently no requirement for pre-existing pension funds to issue public RFPs, and managers are often appointed on a one-to-one basis.
In contrast, the new closed and open pension funds are obliged to make a public RFP for the management of their assets at regular intervals. This has introduced a more transparent process of manager selection and opened up the new Italian pensions market to foreign managers.
This discrepancy could disappear if the government has its way. Lucio Francario, the president of Covip, suggested in a paper published earlier this year that he would like to see the pre-existing pension funds brought into line with the new pension funds in terms of how they are regulated - including the obligation to issue a public RFP.
The new ‘open’ pension funds also represent an opportunity to asset managers, largely because of their unrealised potential. The 96 open pension funds have so far attracted only E1.7bn in assets. Kihlgren of Ras AM suggests that this is because their customer base has been individuals – such as the self-employed – rather than groups of workers: “So far open-end funds have taken a very small part of the pension contribution. This is largely because of the fact that it’s an individual product. We see a trend towards a major presence for the trade unions in the management of the open funds, and we see a much stronger growth in this sector.”
However, it is the closed ‘contractual’ pension funds that represent the best opportunity for asset managers, he suggests. “We expect a dramatic rate of growth for next year, and that growth will be driven by the new reform and specifically the Tfr.”
The problem with the closed funds is that assets are concentrated in a few large funds. Cometa (E1.6bn) and Fonchim (E800m) together have more than half the assets under management. Many of the remaining funds are too small to be attractive to asset managers.
Consolidation is inevitable says Greco of JP Morgan Fleming AM: “When the new pensions market began we saw a proliferation of very small pension funds. Most are not viable and so they will either be shut down by the regulator or they will figure it out for themselves and they will merge with each other.”
This will provide fewer clients but better quality business for asset managers, he says: “From an asset manager’s point of view, bigger funds mean that it’s going to be a more profitable business. So consolidation of smaller pension funds is a positive development that has not been perceived or appreciated enough for the benefits it will bring.”
One of the benefits could be a movement from monocomparto to multicomparto investment structures. Multicomparto offers different lines of investment to pension fund members, according to their stage in the life cycle. Typically this means a pension fund will add a growth fund, dominated by equities, and a conservative fund of mainly bonds to its existing balanced fund of bonds and equities.
Asset managers hope that this will accelerate the move from balanced to specialist mandates. Marco Fusco, head of institutional advisory and retail distribution at AXA Investment Managers in Milan, says a multicomparto structure will benefit asset managers with specialist skills: “The tendency for pension funds to go to the multicomparto opens the door for specialised asset managers. Pension funds will be much more able to select managers according to their core expertise.
“This is already happening, and many pension funds are already moving in this direction. This will benefit all asset managers that have a very clear idea of what they are good at.”
There may even be a role for alternative investments in the new multicomparto world. Gandolfi of San Paolo IMI AM says the new closed funds will need to invest in real estate. “Real estate is a good non-correlated asset for the new pension funds. The new pension funds have no real estate in their portfolios yet and so they will have to buy. The old pre-existing pension funds are full of real estate and now they have to sell.”
He suggests that in future pension fund will invest between 10% and 20% of their portfolio in non-traditional assets.
Yet pension fund investment in alternatives and derivative instruments is held back by regulation, says Max Nardulli, head of business for Southern Europe at Goldman Sachs Asset Management: “Regulatory constraints fixed in the Dini law seem to be milestones for the entire industry and dictate a specific limit for the use of derivatives and for the use of alternative investments.”
Nardulli points out that alternatives made available to retail clients though through ‘dedicated funds’ are easy to administer and fully transparent.
“One possible change to the regulations in Italy could be to make a specific reference to dedicated funds as vehicles where pension funds could invest. This would represent a significant step towards answering to market needs.”
Specialist mandates of any significance are still some way off. Anna Vigliotti, in charge of business development and analysis at RAS Asset Management, says: “If you look at the picture today, 82% of total mandates are bond or balanced mandates. There’s still very much a focus on the plain vanilla product, with very little in terms of alternative investments.”
Balanced mandates still provide the core of institutional asset management business, says Greco of JP Morgan Fleming AM. “Even with the multicomparto you still see a number of balanced accounts. They may be balanced accounts with some satellite mandates, but at the moment we haven’t seen yet the total splitting of profiles corresponding to the various comparti into the pure underlying asset classes.”
Roberto Calchi, responsible for pension fund market for institutional business at BNP Paribas Asset Management in Milan says this is inevitable against a background of cautious investment: “Asset allocation in Italy overall is no more than 10% equity and the rest is in bonds or short term cash. The approach is very conservative, and one where balanced managers and bond managers are likely to be favoured.”
BNP Paribas AM currently manages a portfolio of 95% eurobonds and 5% European equity for Cometa.
The move into multicomparto does not mean that pension fund members will necessarily make more sophisticated investment choices. If people are given a choice of investment options, there is a risk that they may switch out of appropriate lines of investment or reduce their investment altogether when markets fall.
Multicomparto choices could encourage more rather than less cautious investment, Greco of JP Morgan Fleming AM suggests. “It is a fact that when you give employees choice they tend to be equity averse. That was one of the reasons why some of the funds resisted moving to the multicomparto. They knew that, basing their decision on short term considerations, employees were not investing in the ‘right’ type of assets.”
The move to multicomparto could prove a mixed blessing: “The multicomparto has somehow complicated things. Because we have the opportunity to give more choice to the members there is a danger that the assets could decrease. People could invest on a more emotional basis, rather than think about what they will receive in a future private pension.”

More investment choice does not necessarily mean better investment choices, Gandolfi of San Paolo IMI warns. “Multicomparto is like a large store which decides to put more products on the shelves. This doesn’t make a better store, it just makes a store with more products. A better store is a store that is able to address the needs of its customers and provide them with appropriate products.”
Ideally, a choice of investment lines will enable pension plan members to devise their own core-satellite strategies he says. “Multicomparto will be very useful when the Tfr reform arrives because people will be able to put assets in a different compartments contemporaneously. They will be able to put the inflow deriving from Tfr in a highly conservative comparto while putting the rest of their contributions into a more risky comparto like equity.”
The growth in the assets of the closed and open pension funds is also likely to lead to a more realistic level of fees. Initially, a low level of assets under management and relatively high fixed costs made it difficult for foreign asset managers to compete with Italian asset managers on price. Now as assets have grow, costs have fallen.
Calchi of BNP Paribas AM says the growth in pension fund assets means that foreign managers can now compete with Italian managers on level terms. “The more assets you have the lower the price will be, because you have a lot of fixed costs. Now that the assets of the funds are more interesting we can be more competitive.”
He believes that, in the second round of RFPs, pension funds will judge asset managers on criteria other than price. “We have the perception that the first round of manager selection has been useful as an educational experience, familiarising the pension funds with asset management. In the second round, we feel that clients will appreciate not only the fee level but also the importance of the quality and level of service. Of course Italian managers are, because of the links that they have, always likely to be favoured. But in the future, matters could be driven in a more efficient way.”
Alessandro D’Andrea di Pescopagano, country manager of AXA IM in Milan, sees “The market has been very competitive market in the first three years on the price side, but it will change, and has already changed, as more pension funds fly to quality. We are now able to get closer to we what we consider the right price.”
The pension fund market is set to expand further with the introduction of complementary pension for public sector workers. The closed pension funds currently cover only workers in the private sector. The Italian government now plans to partly fund a new pension fund for teachers and staff of state schools which will exactly replicate pension plans for private sector workers, including the Tfr contribution.
The fund expects to approval from Covip in this month and will start recruiting in September. Other funds for public employees are likely to follow.
Government per capita funding will be based on a potential membership of 1.2m people rather than actual membership. This means that the fund’s assets will grow at more than E3m a month irrespective of how many people enrol. In other words, it will avoid the painfully slow growth in assets that has hampered the private sector schemes. This could provide the boost to pension fund assets – and to asset management opportunities –that asset managers in Italy have been waiting for.

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