One sign that the new occupational DC plans in Italy are shifting into a higher gear is the beginning of a move from monocomparto schemes, which offer members a single line of investment – usually a balanced portfolio – to multicomparto schemes that offer a choice of investments.
Investment choice in the new complementary DC schemes is still in its infancy. All the new closed pension funds begin their life as monocomparto schemes, and are likely to remain so for the first three years of investment.
The main reason is money. In their early years funds will not have accumulated sufficient assets to support several lines of investment. However, now their assets are growing rapidly, some of the leading funds are taking their first tentative steps into a multicomparto arrangement.
Fonchim, the industrywide scheme for the chemical workers and others, became the first of the closed complementary DC plans to gain approval for multicomparto scheme in August. The scheme will come into operation on 1 January next year.
Andrea Girardelli, operations director of Fonchim, says: “After three years from the start of investing, with 114,000 members and assets of over E600m the board feels the time has arrived to offer associates the possibility of choosing between different lines of investment.”
The scheme has three compartments – an aggressive fund ‘Crescita’, a cautious fund ‘Moneta’ and a balanced fund ‘Stabilita’, which serves as the default option. The default option is, in effect, the original monocomparto arrangement. This was constructed from two portfolios, one with 100% bonds, the other with 60% equities and 40% bonds, producing a combined asset allocation of 70% bonds and 30% equities.
This asset allocation forms the basis of the Stabilita option, where 30% will be invested in the 23 countries of the MSCI World index and 70% in medium- and short-term bonds either in the Euro-zone of the US. The Moneta option will invest 100% in short- and medium-term bonds, while the Crescita option will invest in 60% in MSCI World equities and 40% short- and medium-term bonds.
Fonchim has indicated which people should choose. It suggests that Moneta is suitable for people who are between five and 10 years from retirement, Stabilita is suited to those who have 15–20 years of working life, while Crescita is only for those with more than 20 years.
Girardelli predicts that relatively few will choose Moneta or Crescita. He expects between 80% and 90% of plan members to remain in the Stabilita option. “In effect there are two new funds, not three, and most people will stay where they are.”
There will be no change to the fund management, either, since Fonchim will simply redeploy the existing six managers – Generali, Mediolanum State Street, Pioneer, Ras San Paolo Imi and Unipol. Girardelli says the continuity is for administrative reasons rather than any particular satisfaction with the managers’ performance.
Another closed DC fund that is taking the route to pluricomparto is Fopen, the E200m complementary pension scheme for employees of the part-privatised state power company Enel. Unlike other funds, Fopen is making the transition from monocomparto to multicomparto within a year of getting Covip’s approval for its asset allocation strategy and choice of managers – normally an investment starting point for funds.
This is because Enel already has gained some experience of multicomparto choice in its other pension plan, Fonedenel, a DC plan for managers. Stefano Pighini, holdings finance manager at Enel’s headquarters in Rome, says: “Fondenel was set up as a defined contribution scheme in 1998 but it was not fully under L 124 (the law governing the new closed DC plans) so we were able to pass quickly from monocomparto to multicomparto in 1999. Since then it has been run with four lines of investment, and that has given us a lot of experience.”
Fopen submitted an application to the Commissione Vigilanza (Covip) in May but does not expect to introduce a multicomparto scheme for another six months, says Pighini. “Very detailed questions are asked before approval is given.”
This slows down the approval process. However, Pighini suggests Fonchim’s multicomparto could provide Covip with a model for other funds. “This could act as a benchmark, and the other funds will have to follow it to get the Commission’s approval.”
A smooth and swift passage from monocomparto into multicomparto is important if the closed DC plans are to increase the returns they offer to plan members. Gennaro Amore, vice president of Deutsche Asset Management’s office in Rome, points out that the performance of the new closed DC funds must at least match the guaranteed returns of the TFR , Italy’s system of severance pay, if funds are to increase both their assets and the returns on these assets.
“The change from monocomparto to multi is one of the keys that could unlock the flow of TFR finds into DC schemes. At the moment there is a lot of risk-free asset allocation. Pension funds have 80% in bonds and the duration is very short.
This reduces risk but does not produce returns. “In the last six months they have outperformed the benchmark but they have not outperformed the TFR. We saw returns of minus 6.5% on the portfolios against 3.2% on the TFR So if you are going to persuade people to join the new DC schemes you are going to have to improve the returns, and only a move to multicomparto can do that.”
However, people will need advice in the new multicomparto environment, he warns. “My fear is that choices will be solely market-driven, as they are with mutual funds in Italy. When markets go up people buy only equities and when they go down they buy only bonds.”
Amore says there should be a capital guarantee option for workers with less than three years to retirement. “Capital guarantee could help trade unions to convince workers top accept the transfer of TFR to the pension fund.” He also suggests that the model of three basic lines of investment should be only a first step. “Funds should be offering life cyclical investment choices so that they choose different options as their circumstances and needs change.”
The open DC funds with ‘collective participation’. have offered multicomparto investment choice to employees from their inception. However, these are not open to people who qualify for a closed DC scheme. This may change. There are plans before parliament to level the playing field and increase competition between closed DC plans and the open plans.