Since the law allowing the creation of complementary pension funds came into force in 1999 in Italy, the industry has grown, but at a much slower pace that some had expected.
The new market had a poor start with low asset flows into the new pension funds and low rates of affiliation to the new schemes. Nevertheless, it shouldn’t be forgotten that it’s still early days. The changes experienced in the past few years have already been quite significant.
It seems that the only thing that the Italian pension fund industry needs to develop further is time – time to consolidate what has already been done and time to transform the new system into a more mature and professional one.
Everything within the industry is new. The pension funds are new and are starting from scratch, with no affiliates and no assets. The supervisory body, the Comissione di Vigilanza sui Fondi Pensione (Covip), is also new. The boards of trustees are not investment professionals but representatives of employees’ and employers’ organisations, who are also getting used to their new roles. Neither is there a mature consultancy market advising on pension funds investment. Looking at all these factors, it is not difficult to understand that the market it’s still on a emerging stage but its pillars are already in place and it’s moving in the right direction.
According to data from Covip, the number of newly created pension funds – those founded after the introduction of the new law on complementary pension funds – totalled 141 at the end of last year, of which 43 are closed-end or negotiated pension funds and 98 open-end funds.
The number of affiliates to the closed-end schemes was 885,651 at the end of 2000, representing an increase of 26.3% of the previous year’s figure. However, only around half of the negotiated schemes have been authorised to start their activities. The other half have only been authorised to collect subscriptions. The process is not as fast as some would like it to be, but at least new pension funds are being created.
In the open-end funds arena, 85 schemes were authorised to trade at the end of 2000.
However, the real problem in the Italian market is that the number of workers joining a pension scheme is still very low. “And we still don’t understand why,” says Simone Bini Smaghi, deputy director general at Milan-based asset management firm Arca. “We find especially hard to understand why there is not more interest among young people about these issues and I believe it’s because there is a huge identification problem,” he says.
“Pension funds are not just another financial product,” he adds. “People have to identify with them to join.” And the latest figures regarding affiliation to the new closed-end pension funds show that this is the case. Of the three largest pension funds, only Fondenergia (Lit235bn – e120m), the pension fund for the electrical sector has a relatively high affiliation rate (65%). The other two, Fonchim (Lit711bn - e367m), for the chemical and pharmeceutical industry, and Cometa (Lit999bn - e516m), for the metal workers, only have 57% and 34% respectively.
“If you look at the old pension funds, especially those of the banking industry, you see that the affiliation rate is around 85%,” says Bini Smaghi. “There is a long way to go in terms of education and communication to attract more people into the new pension funds.”
He adds: “The government has to make an effort to explain to people that the pensions they will have will be 50% of their salaries and that they need to compensate that gap somehow.”
This could be a difficult task for newly elected prime minister Silvio Berlusconi, who recently declared he would quit his political career if he doesn’t create 1.5m jobs, cut taxes, reduce bureaucracy, transform Italy’s infrastructure and reform pensions.
And indeed, governments have played a major role in the development of the Italian market and investors’ attitudes. The continuous changes of government – Berlusconi’s is the 59th government that Italy has had since the second world war – have helped developing uncertainty among plan sponsors, employees and investors. “Investors do not like these changes very much and they think they can wait a couple of years and see if a new more favourable law comes into force,” says Matteo Astolfi, manager for institutional clients at Pioneer Investment Management in Milan. “In this sense, every change of government brings a questionmark to the industry.”
In terms of investment, and focusing on the five new closed-end pension funds that already have assets under management, Fonchim, Cometa, Fondenergia, Fondo Quadri e Capi Fiat and Fondodentisti, the asset allocation is still quite conservative, with around 70% of total assets invested in fixed income, but other investment options such as alternative investments are being discussed among institutional investors.
“In Italy we are still going from euro bonds and Italian equities to international, corporate and high-risk bonds and euro equities,” Astolfi says. “We think the next step will be introducing more international equities and, especially, alternative investments.” He adds: “However, it is necessary to take into consideration that today many old pension funds still have large amounts invested in real estate, around 60 or 70% of their NAV, and these are difficult to modify.”
When the first closed-end pension funds were created, they all established a single investment line for all their members, not taking into consideration factors like age or risk profiles of the subscribers. At that moment employees and employers were also dealing with the transfer of the TFR – a lump sum that workers receive when leaving a company- into the new pension funds.
“Most closed-end funds only offer one investment line, but multi-line funds are a very important issue as far as benchmarks and performance are concerned,” Pioneer’s Astolfi says. “Moving from a single investment line to a multi-line approach where employees can choose their own investment option according to their age, risk tolerance and so on, could help the boards of the pension funds in not being too afraid of bad performance because the subscriber should have known he or she was taking more in risks by choosing for instance an equity line. Also the TFR’s return is being used as a ‘hidden’ benchmark, and plan sponsors find a lot of difficulties when it comes to explain performance below this mark,which last year was 3.5%.”
“Most of the boards of closed-end pension funds chose not to cause too much of a cultural shock to the employees by not offering them investment choices. By doing so the boards decide the risk/return on behalf of their members,” says Laurent Huck, chief executive officer at Invesco in Milan. “But you have to take into account that all these new pension funds are defined contribution schemes where the benefit account for the employee depends largely on the investment choice. So you might want to transfer that risk to the employees by giving them some choice among different investment options.
“On the other hand, the open-end schemes are nearly all offering multiple investment choices. I think closed funds will tend to do the same and some of them, like Fondodentisti, for which we are a manager, are already offering different investment lines to their members.”
Invesco is one foreign asset managers that has found its place in the Italian institutional market, seeing its business grow considerably during the past few years. However, Italian institutional investors still tend to go for Italian asset management houses.
“The chosen investment managers are mainly domestic for the time being,” Huck says. “Our strategy is to be more local than our global competitors and more global than the local. You need to be very local to get this business.”
Contrary to other more developed markets, when it comes to choosing an investment manager in Italy, the fees issue, if not the first, is always one of the main criteria they take into consideration. “The reason is that, for the time being, the market is not mature enough, and quality is still not well differentiated,” he says. “Also pension funds still don’t have any money so they can’t pay for services. But this will change when the market becomes more end-user demand-driven and the need for better service will be higher.”
Henk Ruitenberg, managing director at ABN Amro Antonveneta in Milan agrees: “It depends purely on the client, so we are offering both opportunities. It’s up to them whether they want to do all their business in Italy or not, but I believe that pension funds and other institutional investors will have a growing preference to be serviced by the experts. In this sense, we see ourselves as a global player with local presence and our clients realise that.”
And it’s clear that more and more Italian institutional investors recognise and demand global expertise. “Competition is tough and all of the major international houses are already here,” says Fabrizio Gualco, director at Credit Suisse Asset Management in Milan. “Most of the foreign houses entered the market through the retail side and are now moving towards the institutional market. I think what investors want and are demanding more and more is good communication and being close to them, because they need to know they can follow up the managers once the mandate has been awarded.”
The competition will also bring more transparency and less focus on low fees to the market: “Today there are still some pension funds that pay more attention to the fees than to the historical returns, without considering that some asset managers apply low fees but make good earnings for the group by trading a lot, with the turnovers of their portfolios growing more and more without a real benefit for the client,” Pioneer’s Astolfi says.
Piero Marchettini, managing partner at Adelaide Consulting in Milan, believes that the fees charged for some managers are extremely low, and this is not helping the development of the industry. “Asset managers in Italy are competing on fees and this is ridiculous,” he says. “They cannot survive on those fees and they are not helping towards the professionalisation of the market at all.”Adelaide provides actuarial, plan design and asset allocation advice to institutional clients from its office in Milan and Rome. And although it’s true that pension funds seem to need these consultancy services more and more, consultants are still not playing a major role in the market. “Consultancy for pension funds is not as important in Italy as it is in other countries, it’ s simply because there is not a real market for pension funds yet. Everything started very recently and it will take time,” Marchettini says.
“Consultants will definitively become more important in the near future, because the problem now is that pension funds do not have the money to pay for these services,” says Arca’s Bini Smaghi.
“It’s only a question of time and it’s all about the size of the market,” says Invesco’s Huck. “If there are not more consultants in the market it is because their services are expensive and pension funds have very little money. Every cost has an impact on performance and they just can’t afford it.”
So it seems that the way the market is working now will remain the same until more affiliates are attracted and more assets are put into the pension funds. For some, the solution to the problem has to be found in the TFR. Although those workers hired after 1993 are already transferring their TFR into their pension fund, in case they join one, the remaining workforce is not obliged to do this. The amounts of money that today are into the TFR are huge and companies are not to happy about getting ride of it because in a way they are using it to finance themselves. So, although TFR could be the injection of money that the Italian pension fund market needs, it could take some time to happen.
“Two years ago I knew that we would have to wait quite a long time before we see TFR being transferred into the pension funds and we are still waiting,” says Filippo Reda, managing director at Sanpaolo Imi Institutional Asset Management in Milan. “Things like this, especially in this country will never change sharply or dramatically, but we are closer now.” He adds: “A good number of funds have already started and their subscriptions are increasing, so if the TFR was transferred into these funds could be a boom for the Italian pension market. It might happen early next year and then we could see the industry really growing.”
And it seems that everyone is waiting for this to happen, because asset managers are expanding their capabilities, increasing their product range and introducing more sophisticated investment approaches. They now only need to win new mandates to prove themselves right.
The market has potential and asset managers have long experience in dealing with Italian investors. “The growth of the asset management industry in Italy as a whole has slowed down during the last year, after having held an outstanding pace in the past few years,” says Carlo Benetti, head of institutional portfolio management at ING Investment Management in Milan. “Such a slowing down may be considered as physiological if we paid attention to the Italian market global size but the behaviour of the financial markets during the second half of the year has to be considered as well.” He estimates that at the end of 2000 the global assets under management in Italy in nearly E1trn, including mutual funds, segregated accounts and pension funds. It’s important to highlight that the size of the pension fund market is only equivalent to 4% of the size of the mutual fund industry in Italy.
But fund managers seem to be prepared to wait for a while. “Slowly but steadily, the interest towards pension funds is growing,” Benetti says. He continues: “Since the competition is on a global basis, knowledge and experience of certain level, as well as high specialisation are required. Management companies need to offer their clients a continuum of investment opportunities with difference levels of risk and worldwide competences.” He adds: “We are offering this to our clients right now and will continue improving services while the market grows.”
Also managers trying to compete in the pension fund arena in Italy have to show strong commitment to this market. “Italy is not like the UK or the Netherlands where pensions funds know that asset managers have obviously a commitment with this field. Here the market is very young and clients want to know that you are here to stay because is a long-term business,” says Sanpaolo’s Reda.
And those who are in Italy to stay will benefit from what the market has to offer during the next few years. Obtaining data on market share by asset managers in the institutional business is difficult – Covip releases figures regarding the schemes under its supervision but it’s almost impossible to find out what is going on in some of the old pension schemes and the banking foundations. However, it’s clear that three Italian players - Intesa, Monte dei Paschi and Arca still dominate the business. The others are growing, competing with the international houses and fighting for mandates.
Interesting initiatives are being developed in the market, such as the creation of a pension fund for housewives, regional pension schemes and a new pension fund for state teachers. So the interest is there and now it’s just a question of time to consolidate these ideas.During the coming months, more closed-end funds will start giving mandates to external managers, and those which still haven’t received contributions will do so.
The open end arena will also change as the regulatory framework is becoming more favourable with tax incentives which are reducing the differences between close and open end schemes. The market is still finding its future shape and no one is quite certain what it’s going to be. “In Italy we have reformed the second pillar and we are now addressing the issue the third pillar,” says Invesco’s Huck. “But I do not see a huge difference between these two pillars. We don’t know if the second pillar will be mostly closed funds and the third mostly open.” He adds: “Or if we have a second pillar which is both closed and open pension funds, what market share the open end funds will have.”Also, a new insurance product (PIP) has been introduced in the third pillar but it’s still not clear that it will operate under the same rules as open-end funds.
Trying to find answers to this confusion, the transfer of TFR into pension funds and the possibility of collective affiliation to open end funds will be the key issues in the months to come. Political will and employee identification with the new schemes will be the ingredients for consolidation.

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