Italy’s privatised first-pillar pension funds are modernising their strategies
Italy’s ‘casse di previdenza’, first-pillar funds for professionals, operate within a complex regulatory environment. They report to several different authorities, including both the labour and finance ministries and COVIP, the pension fund regulator. An update to their investment regulations has been on hold since 2011. At the time, the law intended to modernise their asset allocation framework was passed by parliament but never adopted by the relevant ministries.
There is no sign that the process will be completed soon and the new rules are unlikely to force substantial changes to portfolios over a short period. However, once the new rules are in place, asset allocation strategies are likely to shift over the medium term. The new framework is based on qualitative principles rather than quantitative limits.
Meanwhile, many casse the previdenza are tirelessly working to improve their investment strategies and deliver better outcomes to members.
ENPAM embraces liability-driven investing (LDI)
Enpam, the first-pillar pension and welfare fund for doctors and the largest private pension fund in Italy, manages about €22.5bn of assets.
The fund delivers a mix of DB and DC pensions and has always been in surplus, as contributions have historically exceeded payouts. So far, the fund has followed a total-return approach. However, it is now changing its approach to balance sheet management, as recent asset-liability management (ALM) studies show that the net contribution balance will temporarily turn slightly negative 10 years from now.
Alberto Oliveti, Enpam’s president, says that the fund has run a thorough analysis of the future evolution of the balance sheet. While the endowment should continue to grow, the analysis concluded that an LDI approach is the best way to manage the fund in the years to come.
The plan to switch to LDI is under way, but it will take some time to come to fruition. Emilio Giorgi, Enpam’s chief risk officer, says: “We will gradually split the portfolio in two parts – a performance portfolio and a matching portfolio. This means we need greater interaction within the organisation. Different parts of the organisation need to work together to drive the process.” A portfolio split between return-seeking and matching assets also means that both the asset allocation and the risk allocation will have to reviewed.
The adoption of the LDI strategy is essentially motivated by a need for forward planning, says Giorgi. “We do not want to find ourselves in a position where we have we have to sell assets to match liabilities during times of market turbulence,” he says.
Enpab introduces lifecyle strategy, changes asset allocation model
Enpab, the first-pillar fund for biologists, managed €677m at the end of last year. At the end of last year, it invested nearly 13% of its portfolio in alternative assets, including real estate and private equity.
Danilo Pone, Enpab’s CIO, says that the fund will continue to invest in alternatives, with a focus on Italy’s economy. Pone says: “Despite the wall of liquidity that has flowed into private markets, these markets continue to offer an attractive risk/reward profile. The casse di previdenza have always been first in line in supporting the real economy. These investments are both topical and coherent with our strategic objectives. Naturally, we monitor that risk/reward profile closely.”
Pone says that the fund is planning to implement a ‘guided lifecycle strategy’. “This consists of segmenting the population into different groups, based on residual years of contributions before retirement. The specific needs of each group are then identified and built into the strategic asset allocation”, he explains.
Enpab’s portfolio is well-diversified and the focus for the future will continue to be on broadening the exposure to alternative assets, says Pone.