Italy: In search of the right balance
Fresh allegations of wrongdoing involving Italian pension schemes show that governance should be at the top of the country’s pension agenda. While regulators are still struggling to convince more people to join second-pillar schemes and are discussing measures to liberalise the investment rules for certain pension funds, attention has turned again to unresolved issues of trust and professionalism.
In May, seven people were arrested on suspicion of various crimes, which included conspiracy to commit fraud, bankruptcy, embezzlement and tax evasion. The alleged victims of these crimes are three major Italian casse di previdenza, first-pillar funds for white-collar workers. They are the accountants’ pension scheme Cassa di Previdenza dei Ragionieri (CNPR), the journalists’ scheme INPGI and the doctors’ scheme ENPAM.
The suspects are well-known personalities of the Italian capital markets business, all of them involved in the Italian investment company Sopaf. The Italian media named them as Ruggero Magnoni, former European vice-president of Lehman Brothers and chairman of the Italian arm of Nomura; his brothers Aldo Magnoni, founder of Oak Fund, and Giorgio Magnoni, chief executive at Sopaf; and the former’s son Luca Magnoni, a board member of Sopaf.
The Guardia di Finanza also arrested Andrea Toschi, former chairman of Arner Bank and chief executive at the Sopaf-owned asset manager Adenium, Alberto Ciaperoni of Sopaf and accountant Gianluca Selvi.
Investigators estimated that the alleged crimes, which are thought to have occurred between 2009 and 2012, netted the suspects almost €80m, with €50m taken from CNPR, €7m from INPGI and €20m from ENPAM. The investigation is still trying to establish the role each of the accused played and clarify the extent of the damages suffered by the institutions.
It was reported that CNPR was defrauded through asset manager Adenium, a Sopaf subsidiary. CNPR’s sole adviser is Prévira Invest SIM, which had struck a partnership with Sopaf in 2011 to provide CNPR access to Adenium-sponsored SICAVs. According to Italian media, investigators are asking whether Adenium had purchased €52m worth of securities from another company, HPS, owned by Gianluca Selvi, who was close to the Magnoni brothers. The proceeds had then allegedly been shifted to offshore accounts, to be finally channelled to the suspects’ accounts.
In a statement, CNPR said that it welcomed the prosecutor’s decision to investigate the matter and that it had reported it before it was made public, declaring itself the injured party. The statement said that CNPR intended to “report and provide evidence of the unbelievable seizure that has been perpetrated against the institutions, in order to demand precautionary measures.”
It added: “Now that the institution’s requests have been met, we will continue to follow the developments around Sopaf and its controlled entities with the assistance of our experts and our lawyers. Whoever is responsible for this gross pillaging will have to pay back every last cent.”
Another previous statement by CNPR said that in 2012 the institution had strongly rejected Sopaf’s bid to acquire a stake of Prèvira Invest SIM, after an audit of Sopaf’s subsidiary Adenium revealed a situation of financial distress for the asset manager. Adenium was subsequently put under administration in April 2014, as can be seen in records published by the Italian central bank, Banca d’Italia.
Further reports by Italian media argued that Sopaf made numerous reckless investments in the past few years, which were making substantial losses. Reports suggested that the company was intentionally going bankrupt, but Sopaf’s owners defended themselves, saying it was a case of miscalculation of risk.
At a glance
• New allegations of mismanagement of first-pillar funds’ assets have emerged.
• Worries about first-pillar funds are echoed in the second-pillar system, raising questions about the sector.
• Issues of conflicts of interest, disclosure and professionalism are yet to be addressed.
• First-pillar funds have an intricate regulatory environment but can invest in a wider range of assets.
• Second-pillar funds have weak internal structures that force them to rely on external consultants.
Sopaf had also been doing business with INPGI and ENPAM, selling them stakes in Fondo Immobili Pubblici (FIP), a state-run real estate fund, according to the Milan public prosecutor Gaetano Ruta. Investigators speculate that Sopaf made an illicit profit selling the two institutions FIP stakes after forcing the primary supplier of the securities to sell them to Sopaf at an unjustifiably lower price. An Enpam spokesperson specified that the returns from the stakes in FIP owned by ENPAM have been positive, with no loss made on that investment.
These new allegations follow a number of scandals that have erupted in the Italian pension sector over the past few years. Between 2011 and 2012, ENPAM was involved in a scandal that saw former chairman Eolo Parodi and other former employees and advisers arrested on suspicion of wrongdoing. They are soon to be tried for charges relating to ‘toxic’ investment in CDOs that had put a sizeable part of ENPAM’s finances at risk.
ENPAM, which currently has €15bn in assets, has overhauled its investment policy and processes. In particular, this has involved scaling back riskier assets. In addition, the fund recently launched an international search for a new investment adviser – a move that the spokesperson says, “is the last step in our new governance programme.”
Other media reports have questioned ENASARCO, the shopkeepers’ pension scheme. In 2007 the fund’s management was accused of taking bribes to dismantle its property portfolio. In May 2014, Italian media outlined how it had been heavily exposed to risky structured products linked to Lehman Brothers.
Such scandals put casse di previdenza under the spotlight. As first-pillar defined benefit schemes that were created as public entities, they found themselves in an unclear regulatory environment when they were privatised in 1995. In particular, they faced less stringent limits on investable assets compared with the then newly-created industry pension funds.
This led them to gradually diversify into riskier assets. Although they also developed stronger internal structures, such as large investment teams to manage portfolios directly, governance remains a problem for them, as recent reports demonstrate.
Claudio Pinna, managing director at Aon Hewitt, has worked with ENASARCO to improve its governance profile, a project that has involved the approval of a new charter to make the fund’s investment process more transparent. “Casse di previdenza need to improve their governance through self-regulation or the legislator will step in to introduce specific dispositions that could limit them,” Pinna says. “The main areas should be the management of conflicts of interest, disclosure and roles and responsibilities of management.”
Issues of governance affect pure second-pillar schemes in a different manner. At their inception in 1993, they were given much clearer regulation, including an independent control agency, COVIP, and strict rules about the markets they could enter. There is a general agreement that, because of their regulatory environment, these pension funds would hardly be able to replicate similar deals, and therefore they are more insulated from ethical problems.
However, industry representatives are worried that the reputation of the system as a whole might be damaged.
Massimo Malavasi, chairman of Fondo Arco, second-pillar scheme for employees in the wood, furniture, forestry, brick and concrete sector, says: “The institutions involved in these scandals faced serious ethical issues. But what happened can reflect on institutions such as ours, which are managed well by individuals with principles.”
He adds: “This goes beyond regulation issues. The governance tools, such as custodian banks, that industry funds have would not have changed the behaviour of the people involved. Our duty as pension funds is to work to the best of our abilities and with honesty – the livelihood of so many people and their bid to integrate their future state pensions depend on us.”
Giorgio Valzolgher, managing director at Laborfonds, pension scheme for private-sector employees’ of the Trentino-South Tyrol region, says: “Undoubtedly the actions of prosecutors against these funds do not help our sector and have a negative impact on people’s opinions, at time when they are wary of second-pillar pension investment.”
Many also admit to a wider governance problem that is not limited to casse di previdenza. At industry pension funds, professionalism remains an unresolved issue, as does the power of management boards and the role of external consultants.
Boards are split between employer and trade union representatives, with each generally holding the top seat for five years at a time. This means that board members often lack the skills and knowledge required to manage large investments.
At the same time, although these funds have been restricted in terms of the asset classes they are permitted to invest in, they were given looser guidelines on how their internal structures should be shaped. As a result, boards tend to centralise every process, including selection of investments.
Because of their lack of knowledge, pension funds devolve considerable power to external investment advisers. “When boards have poor skills in terms of governance, consultants acquire too much power,” says Francesco Vallacqua, board member of Espero, the pension fund for employees’ of the education sector, and professor at Bocconi University.
Vallacqua continues: “Sometimes it is unclear whether it is the fund or the consultant who is actually driving decisions. I would introduce a truer selection process for them. They are selected through public, international searches but these searches do not follow the same standards as those implemented for asset managers. Like asset managers, consultants should be selected according to strict selection processes that include systematic evaluations.”
Pinna believes that conflicts of interests and issues of disclosure have not been tackled properly. “Governance would be improved across the sector if boards had independent members and adopted detailed codes of conduct to manage conflicts of interest. Not all pension funds have done that. As a result, when a conflict of interest exists it is not declared and resolved accordingly in all cases. There have been several situations where external consultants are connected to money managers. Also, several pension funds do not provide transparent information on their activity,” Pinna says.
Davide Squarzoni, managing director at Prometeia, believes there is still work to do in terms of management structures. “At pension funds direction and monitoring should be separate from the financial management,” he says. “Today, these different responsibilities all fall with board members without any distinction of roles. Boards of this kind are prone to arguments and not inclined to take responsibility. Only if those roles are separated can funds become true long-term investors.”
The debate is further complicated by recent government proposals to wind up COVIP, the pensions regulator that oversees the activities of both second-pillar funds and casse di previdenza. COVIP would be abolished, together with other ‘costly’ government agencies in a bid to save money, and its functions would be taken over by the central bank. This worries many pension funds, which argue that the presence of an independent regulator is key for the health of the system.
Another concern is that placing COVIP’s remit under the auspices of Banca d’Italia would create conflicts of interest because it also controls the banking industry, which owns many institutional asset managers.
“We need a sole authority for private pension investment of the first and second pillar,” Squarzoni adds. “This entity should bridge with other public, political agencies, and should enforce best practice of governance. These best practices should be agreed by representatives of both workers and employers.”
The many changes that have occurred over the past two decades show that Italy is serious about reducing over-reliance on state pensions. However, episodes such as those outlined above are a warning sign that much work needs to be done to build an infrastructure and a culture of pension investment. They are also a strong indication as to why workers have not fully engaged with second-pillar funds, as the poor membership figures suggest.