The proposed new asset allocation framework for Italy’s first-pillar funds contains several controversial measures, finds Gail Moss

At a glance

• Italy’s casse di previdenza – first pillar funds for white collar workers – await a new asset allocation framework.
The law is expected to replicate the regime regulating second-pillar funds.
Experts say the rules should differ and that the proposed asset allocation limits would force sub-optimal shifts.

In November 2014, Italy’s second pillar pension schemes became subject to a new investment framework granting them more freedom in terms of asset allocation. It also moved regulation from a quantitative to a qualitative basis, allowing investment in previously banned asset classes, provided funds had the required monitoring capacity. 

Now it is the turn of the casse di previdenza – privatised first-pillar funds for professionals – to receive a revamped investment regime. 

A draft law had been expected, although commentators now report that the government has put the project on hold because of criticism. 

The law was expected to introduce a similar framework to that designed for second-pillar funds. But, while second-pillar funds now enjoy greater investment freedom, the rules would restrict the permissive arrangements currently enjoyed by casse di previdenza. In particular, there would be restrictions on real estate holdings and ‘risky’ non-liquid investments.

There were also intended to be changes in terms of oversight. At present, casse di previdenza report to a number of bodies, including COVIP, the supervisory authority for private pension funds, and the ministries of labour and finance. The new law is likely to strengthen COVIP’s supervisory role.

Federico Zanon, vice-chairman of ENPAP, the pension scheme for psychologists, says: “We are very attentive on the theme of governance and we think that developing the governance culture is to be highly recommended. But, the new law is only a small part of this process in Italy.” 

Claudio Pinna, managing director at Aon Hewitt in Rome, says the law may not regulate in the most appropriate way because it is based on the law for second-pillar schemes, which are generally defined contribution (DC), while casse di previdenza are defined benefit (DB) schemes.

“The asset allocation strategy in a pension and welfare organisation must be the result of strong actuarial and financial analysis, and require a target of risk/return over a long-term period. We think that it’s difficult to make this kind of decision by law”
Federico Zanon

“DB schemes invest in a different way from DC schemes, so they may need different limits on investment,” Pinna says. “Furthermore, the required statement of investment strategy for casse di previdenza should include an explicit declaration of the economic objectives they want to achieve, and the impact of the investment strategy to achieve this. It does not.”

The supervision of casse di previdenza is key following several cases of mismanagement uncovered in recent years. Possibly because of these cases, the new law is likely to contain the requirement for casse di previdenza to put all fund manager mandates to public tender.

However, Pinna says this is most damaging. “If pension funds have to do this every time they change managers it will take an enormous amount of time,” he says. “That means it will take far too long to replace an underperforming manager, or to take advantage of fast-moving market opportunities.”

This is also the main problem for ENPAM, the pension fund for doctors. Its €17.5bn portfolio includes €11.9bn in financial securities – equities, private equity funds, and government and corporate bonds – which would be subject to the new rules.

ENPAM already follows the existing public tender rules for its risk managers and investment advisers. But extending that process to asset managers would be damaging, says an ENPAM spokesperson.

“It would take three years from start to finish of the process,” the spokesperson says. “So while you may have the money now, you’ll only be able to invest it in three years’ time, if you’re lucky.”

They add that all procedures would be subject to the Italian Public Contracts Code, and every contract could be disputed at regional administrative courts. 

They conclude: “All this would effectively exclude international managers, as the tender rules are so complex they would prefer not to compete at all. So, we would have a reduced number of managers to choose from.”

The proposed asset allocation rules have also come under fire, particularly the limits on real estate, which is expected to be set at 30% of portfolios. 

At present, there are no limits. When the casse di previdenza were set up in the 1990s, real estate was the only investment permitted. Since then, they have been allowed to diversify into bonds and equities, but real estate still dominates. 

As a consequence, restrictions on the asset class could lead to offloading of property investments, possibly at fire sale prices. Pinna says: “Most real estate held by casse di previdenza is located in Italy, in big cities. So, if they had to sell immediately, it would have a negative impact on prices. The government doesn’t want that, so I would expect a transition period of five or ten years allowing pension funds to comply with the new limits.”

ENPAM is not likely to be affected by these new rules. At present, the fund owns €5.6bn-worth of real estate, equivalent to 32% of its portfolio. 

ENPAM forecasts its total assets will increase by €19bn within the next 12 months, so without further purchases the percentage held in real estate would fall even further. 

According to ENPAM, a bigger threat is the 10% limit on illiquid investments such as private equity and mission-related investments. The latter asset class forms a growing part of its portfolio, as the fund starts to invest in Italian industries associated with the medical profession.

The ENPAM spokesman says: “We would be limited to participation of 10% in individual funds, and as we are a very large investor, it would be difficult to find nine other pension funds as big as ours to come in as co-investors.

“If these limits were imposed, we could be forced to sell our participations in funds. That means we would lose money, as well as relinquishing our efforts to advance the work of doctors.”

In contrast, ENPAP says it is unlikely it will have to sell any assets from its €1bn portfolio. Its real estate investments form a small part of the whole.

However, Zanon says: “The asset allocation strategy in a pension and welfare organisation must be the result of strong actuarial and financial analysis, and require a target of risk/return over a long-term period. We think that it’s difficult to make this kind of decision by law. The law cannot control demography, jobs, social conditions and the development of the population.” 

Another provision of concern to the industry is the expected pressure on pension funds to help capitalise the banks.

At present, around €4bn has been injected by institutional investors into the Fondo Atlante, a fund set up by the Italian government to help recapitalise struggling banks (see separate article).

The new law is expected to use tax rebates to encourage all pension funds to invest in this fund, a move which Pinna criticises, as he says funds might divert assets that could earn a better return elsewhere.

Pinna is also keen to see a reduction in the 26% tax rate charged on investment returns to all pension funds, including casse di previdenza. He says this could be done as part of the next budget law.