Italy: Moves to improve standards
Head of consulting business
There are many ways for casse di previdenza and industry pension funds to improve their governance. The roles and responsibilities of management need to be clarified. Conflicts of interest need to be addressed and appropriate levels of disclosure need to be defined. More attention should be given to international best practice, which often is not followed. For instance, boards of directors are often involved in decisions on single investments instead of selecting the investment strategy and monitoring the results. Also, board members are generally chosen from among scheme participants. Rarely do they have the necessary skills, and not all pension funds organise regular training courses for them. Additionally, when conflicts of interest arise, they are not always declared and solved accordingly.
The objective of new legislation should be to lead all pension funds to issue and apply a set of detailed codes of conduct. There should be an obligation to define the economic goals of the pension fund, and to conduct a specific analysis before each investment decision in order to assess its impact on the fund. Disclosure of all decisions needs to be provided and the effect of decisions needs monitoring. At the moment, several pension funds do not provide transparent information on their activity.
CIPAG – first pillar chartered surveyors fund
The dynamics that created those episodes [of wrongdoing] are not known exactly, therefore it is difficult to judge. It would be regrettable, however, that an issue about investments of casse di previdenza should create the need for further legislation.
In many cases, casse are victims of bad behaviour, much like larger and more structured investors. Investments, even the more traditional ones, are risky by their nature and it is often forgotten what happened with Argentinian government bonds or bank corporate bonds with a triple-A rating.
Bearing the responsibility for the governance of large-scale assets is not easy because excessive prudence is often harshly criticised by members, and excessive risk-taking leads to trouble.
Our direct experience in long-term investment leads us to work with simplified processes that respect key rules on investment and avoid excessively sophisticated ruses, to avoid surprises and offset the chronic turbulence of the market. In 2001, we chose to entrust our investments to a custodian bank and international managers. These are controlled by a separate entity that has been created together with other institutional investors, in which we retain a stake.
CNPADC – first pillar chartered auditors fund
The governance problem exists and is caused by a series of circumstances. Firstly, casse di previdenza have solid internal structures, but face controls by many different agencies, and uncertain regulation means the controls are more formal than substantial. Moreover, if these agencies don’t interact there can be no overlap.
Another element is the efficiency of rating agencies. When a security is rated triple-A but drops in value all of a sudden, how can repercussion on portfolios be avoided?
At CNPDAC we have clear, unavoidable steps that need to be taken as part of the investment process. Based on the guidelines approved by members of the board, the investment team and the investment committee start a selection process involving the adviser.
Outcomes are subject to approval by the board. Every decision made by the management board is documented and the documents are made available to the regulator.
Additionally, we focus on achieving high diversification of assets, even within single asset classes.
We also try to employ both domestic and international asset managers.
Espero – second pillar education sector fund
One of the reasons governance is weak is the lack of skills pension fund board members have. The no 79 decree of 2007, which states the qualifications pension fund managers must have, needs to be enforced credibly – it has been implemented only partially. Many management boards of pension funds, while formally meeting the requirements, sometimes lack the substantial skills and knowledge they need to do their job properly. Training courses organised by pension funds are insufficient. A part of the funds devolved by pension schemes to finance COVIP, the regulator, should be used to provide mandatory, public training for pension fund professionals in all key aspects of the business. Another key element is the excessive power and sensitive role that advisers have, especially when boards are weak. Today procedures for selecting advisers do not follow the same standardised steps that are used for selecting managers and this can affect the choice of advisers. I would introduce similar standardised procedures devised by regulator.
Some of the episodes that have occurred are bewildering. There is a serious ethical problem, which involves the people who have managed these entities and goes beyond regulation issues. These episodes can reflect badly upon other different types of pension institutions, even though those are managed well. Regardless of regulation, I would never focus my investment on single instruments. I would never buy opaque and expensive structured products nor would I invest in illiquid SICAVs. I do not think that pension funds have too much of a short-term view, as they are sometimes accused.
We manage our assets prudently but profitably. If you look at our mandates, there are strict limits, because we would rather get lower returns without running excessive risks. Our best asset is reputation. On governance, I would give pension funds the possibility to set up investment committees that can give strong indications to managers. Obviously, you would need highly skilled professionals on boards that are remunerated well, whereas in our world remuneration is generally low. We have a finance commission that does this in part.
FondoPegaso – second pillar utilities fund
We lack all the knowledge needed to make any statement about the nature of certain episodes, but it is clear that they only involve casse di previdenza. The legislation for industry pension funds is very strict and it avoids, or at least reduces, the risk that similar situations will arise. To increase the transparency of casse di previdenza, they have been put under the control of COVIP. A law similar to the 703 law, about to take effect for pension funds, is being discussed for casse di previdenza, which will regulate limits to investment and conflicts of interest.
The problems for casse di previdenza are linked to a lack of regulation, which is the pillar of a healthy, efficient system. These rules need to be matched by virtuous and prudent behaviour of fund managers, who also have to build codes of conduct that strengthen members’ protection.
This is essentially the path industry pension funds have taken in their first 15 years of existence. On this note, we are worried about the government’s proposal to shut COVIP and transfer its duties to Banca d’Italia, which ignores the finer details of controlling pension schemes and would waste the experience of a control agency that stands out, as it has never been associated with controversial situations.
Fonchim – second pillar chemical and pharma fund
Concerning the second-pillar pension system, I believe that the governance system in place is generally sufficient to guarantee the efficient management of funds. The results recently published by COVIP are proof of this. The dual representation system, with members of the employers’ association and trade unions, means choices and procedures are negotiated, which makes them more democratic and transparent.
However, there are aspects that should be improved. Firstly, consolidation between funds would improve costs and performances. More structured funds would also be better organised and more autonomous, relying less on external processes. The regulator is in favour of this and I hope the process will start quickly. Another aspect is the length of tenures of board of directors. To guarantee an efficient governance process it would be sensible to allow boards to be re-elected, because their short tenure periods collide with the long-term interests of the funds.
FONSEA – second pillar airport services fund
Episodes of mismanagement within the Italian pension system are thankfully limited. Governance structures are weak, but the governance problem is linked to a more specific cultural problem rooted in our society and politics. This is why it is difficult to act on governance. Looking at how the system is organised, it is obvious that there should be deeper controls from every stakeholder, including trade unions and COVIP. Control agencies should be more independent. They should be allowed to react immediately when they identify improper behaviour, such as investment in assets that are too risky or the appointment of managers that generate conflicts of interests. Sanctions that are proportional to the damages caused should be enforced. A speedier prosecution service is also needed. Also, a way to publicly disclose the risk attached to funds’ investment choices should be devised.
INARCASSA – first pillar architects & engineers’ fund
The episodes [of alleged fraud] suggest that there was, at least, a lack of rigour in the investment process and a disregard for diversification. Our first and foremost guiding principle is diversification, and this also applies to managers and management style. There is a very strict process, managed by the investment team, which includes due diligence. We look at the whole market to find out what prices other intermediaries are offering for the same products.
As a cassa di previdenza, we were left without clear rules about what we could invest in and how, so we gave ourselves strict rules. For instance, we hired a custodian bank in 2004.
Furthermore, the large number of agencies we deal with means the control system is fragmented. Agencies want to know everything, and the information is so complex that it becomes impossible to manage. Also, there is no cross-examination of information. If an issue remains uncovered, control agencies need to take responsibility as well.
Laborfonds – second pillar Trentino-South Tyrol fund
It is difficult to answer without being too general or putting everyone in the same boat. But those episodes have undoubtedly hurt the system and fuelled negative public sentiment, which is already reluctant to engage with the second-pillar system.
We need to work hard on a governance system, not only on funds’ internal decision making but also on the control systems that oversee them. Transparency about every element of the funds’ operations is fundamental.
Particular attention should be paid to advisory, which should be seen as support for decision makers and not, as often happens, as outright control of the decision making process, while responsibility still lies with boards. Solutions can be found on the legislative and regulatory level. It is important to evaluate the qualification requirements for members of pension fund management teams. There is a need for more technical skills.
It is also important that pension funds comply with the guidelines released in 2012 by COVIP and structure themselves with rules and cutting-edge operational guidelines that outline in detail the duties and responsibilities. Finally, when making direct investments, representatives of funds should take part in investment committees or boards of the companies they have invested in.
The governance problem in Italy involves casse di previdenza and industry funds in different ways. Pension funds have been given clear regulatory rules but they are only just beginning to create solid internal structures – they have difficulty delegating internally.
All the important processes are managed by external entities. COVIP has compelled them to build internal structures and become more autonomous, which they are trying to do. The 703 law that regulates investment limits was good when it was created, but it has taken a long to modernise it.
The new one will be better because it is based on principles rather than limitations. Casse di previdenza were originally public entities that have been privatised. Initially, they responded well, as they were forced to build internal structures because it was not clear what their regulatory environment was. Today, many control agencies oversee their activity but the result is that no single authority carries out a thorough and deep control process.
With the new 703 law, control will be risk-based, and investment limits will be subject to the capacity to monitor and manage risks from the pension funds. So pension funds are allowed to invest in more complex assets if they can show – directly or indirectly with a consultant – that they are able to manage risks and if their investment processes are strong enough. This has a strong impact on governance. The law also covers structure, the process of investment and how decisions are taken.
Previmoda – second pillar fashion industry fund
The ENPAM and SOPAF cases cannot be linked to the governance of industry pension funds. The laws, internal controls and the vigilance of COVIP offer high protection from situations like the ones that have occurred. These episodes, which are very different from one another, are symptoms of a financial world where controls and checks can and should be more stringent, both to avoid heavy losses of members’ capital and even heavier damages to the reputation of the Italian retirement savings industry.
All these episodes occurred because the structures responsible for regulation and organisation struggled to manage the lack of ethical principles, competence and responsibility of individuals. This is why control needs to be unified and streamlined in a single technical authority overseeing private first and second-pillar pension schemes. This independent authority should establish best practice for governance, in agreement with pension funds. In terms of regulation, casse need to finally see their private nature ratified by law, and they need to shift towards sustainable systems and ALM-based management models validated by the control authority.
In terms of governance, the dual model in place for younger casse should be adopted. Institutions need one board for worker representatives and a separate management board made up of skilled professionals working for the scheme. Industry funds should also adopt this model. Boards are too argumentative and do not take much responsibility. Only by splitting representation and management can pension funds become true long-term investors.
Head of investment consulting
I do not see a link between what happened at some casse di previdenza and a general governance problem. It is true that casse are more sensitive to governance problems because they have looser regulations compared to industry pension funds. However, governance is not improved by narrowing limits to investment. As a pension fund, it is key to reflect upon your mission, and based on that you need to define your return and risk objectives clearly. Any investment decision should refer back to those objectives.
Governance is not making a decision on what managers to select, but on what is the correct risk budget. The current trend of funds building up their investment capacity is positive, although there is a lot more work to do.
While funds have now heard the message, they they are still trying to understand what they should do to develop their capacity. Besides, the regulator has asked funds to build more solid structures but it has not organised ex-post controls on these structures.