The Italian pension fund industry is in a state of flux. The government is in the process of finalising reforms that are likely to inject huge amounts of capital into the industry, increasing funds’ responsibilities and their need for tools and services to manage their assets and
At the moment, most Italian pension funds outsource almost all functions – administration, asset management, performance and risk measurement, accounting, etc. For example, Mogliano Veneto-based multi-employer pension fund Generali Vita Previgen Valore outsources its administration to specialist administration services provider Previnet, its and asset management and related functions to Trieste-based Generali Asset Management. Pension fund director Giuseppe Buoro says that the reason that all functions are outsourced to these companies is because of costs and flexibility and the challenges of attempting to operate systems for these functions in-house.
Because of the way that pensions have been organised in Italy up until now, few funds have assets of over e1bn. Also, there has only been limited competition between funds for employees’ money. But this will change if government proposals come into effect, which will require that the individual members’ annual contributions to the Trattamento di Fine Rapporto (TFR) - until now, a lump sum paid to employees on retirement - are no longer held by the employers, but paid into pension funds (and paid out as annuities on retirement). This will inject an estimated e10-15bn annually into the market, says Jean-Marc Crepin, vice-president and manager of State Street’s investor services business in Italy. Furthermore, employees are to be given the choice of where their contributions are to be paid – either into the closed industry sector funds or new competitive open funds.
“We expect the market will grow very quickly if these proposals are approved,” says Claudio Pinna, partner at Adelaide Consultants based in Rome. At the moment, there are few companies offering administration, consultancy and other services to pension funds in Italy because the funds are unable and/or unwilling to pay the fees the companies charge. “But this will change if the TFR proposals_are approved,” says Pinna. Pension funds will have to become more efficient and sophisticated because their assets under management will grow significantly, and they will be subject to competition for those assets.
The reforms are also likely to cause a number of pension funds to merge, says Michael Atzwanger, general manager of Bolzano-based consultancy Centrum PensPlan. “The minimum size of a pension funds will substantially grow, since the administration efforts will become more and more significant.”
At present, funds outsource their functions to providers such as Previnet and Centrum PensPlan for administration, to State Street and Italian banks such as Banca Monte dei Paschi and Banca Intesa for custody and compliance monitoring, performance measurement and securities lending, and to consultants such as Adelaide, Centrum PensPlan and Rome-based Mangusta Risk for strategic and tactical asset allocation, asset manager selection, performance and risk measurement and reporting. Andrea Canavesio, partner at Mangusta, says that even before the proposed reforms come into effect, pension funds are starting to change, attempting to make their businesses more efficient and optimising their portfolio management.
Italian law requires that pension funds appoint a single custodian bank, and most of these banks now also offer additional portfolio administration services, such as compliance monitoring and performance and risk measurement. Crepin says that most of State Street’s pension fund clients take both custody and portfolio administration services. “Pension funds in Italy do not have very comprehensive back offices and if there is any work of reconciliation to be done [between custody and portfolio administration_data] it is usually left to the custodian or administrator, so by outsourcing both to the same provider it is easy to reconcile custody and administration and it can be done in an automated fashion,” he says.
Others believe there will be a slow but steady move towards bringing functions in-house, and some service providers have a strategy to support pension funds in moving in this direction. Centrum PensPlan has what Atzwanger calls a “platform in-sourcing” model, whereby his company offers a wide range of functions on an outsourced basis, but will sell a pension fund its software as and when it is ready to take a function in-house. “As long as a pension fund does have not sufficient size to perform the functions in-house, these are provided as services by the platform. When the fund reaches an adequate size, and in-sourcing becomes cheaper than the services provided by the platform, we offer to the pension fund the possibility to in-source, using our software, while we provide support to the pension fund staff.”
Bolzano-based industry-wide pension fund Laborfonds, with 72,000 members, is using Centrum PensPlan’s platform in-sourcing model, while Milan-based industry-wide pension fund Fonchim is preparing to do the same, Atzwanger says. Centrum PensPlan’s platform was initially created to service pension funds linked to the PensPlan Project set up by the regional government of Trentino Alto Adige, which includes Laborfonds and PensPlan Plurifonds, which has 13,000 members and was created by insurance companies. Now Centrum PensPlan is able to offer its platform to other pension funds outside the project, and three have so far signed up, although Atzwanger did not name them.
Canavesio also believes that pension funds will start taking more functions in-house, especially performance measurement and risk management, the latter of which he believes is the key responsibility of pension funds. He welcomes the trend to in-house functions because he believes the essence of his company’s service is not the software it runs, but the input to it that the company prepares for the software, which requires expertise and analysis. “Some of our clients have already internalised some of the services that we offered them,” says Canavesio. “This leads us to increase the specialisation of our services – we give them the knowledge and software and they internalise this and then we go into more specific factors [in terms of asset allocation, performance and risk measurement,_etc]. It is good for them and good for us.”
Centrum PensPlan and Mangusta write all their own software, as do many of the other companies providing services to the Italian pension fund market. Meanwhile, suppliers of systems for administration, portfolio management, trading, performance and risk management are keeping an eye on the market. None of the major European and US suppliers of these systems, such as Trema, SimCorp, SunGard or Wilshire, has any pension fund clients in Italy so far. Initially, their sales are likely to be to the service providers. Mangusta, for example, is currently reviewing performance and risk management systems from Wilshire and Barra, both based in California, to see if they could provide the company with more sophisticated facilities than it has available with its in-house software.
“Going forward, I think that investment in software, databases and technology in general will be the key factor in the market for consultants,” says Canavesio of Mangusta. “It will make the difference in the future between a state-of-the-art service and a good service.” Furthermore, because of the potential growth in pension funds, consultants will need technology to underpin their services. In the past, consultants were typically individuals, often academics, who gave advice and moved on. “But in past three to five years consultancy companies have begun to enter the market because portfolio management is not something that you can do on a one-off basis – you have to follow it continuously in order to improve it,” he says.
At the moment, Italian pension funds make less use of technology than many of their counterparts in Europe. But pension reform, wherever it occurs, tends to increase pressure on funds to improve efficiency and performance, and that inevitably leads to a demand for more automation and analytical and decision-making tools, and so pension funds will have to become more familiar with what modern technology can do – if only to be able to properly measure the quality of the services of their outsourcing providers.