Italy: The search for pension assets
Italy is rich in private assets but has huge public debts – more than €2trn at the end of 2012, according to the Bank of Italy. Generous, largely unfunded first-pillar pension liabilities are part of this debt problem. They are seen as unsustainable, subject to endless political debate and under a lengthy process of piecemeal reform. Spending on pensions, mainly via the first pillar, is equivalent to more than 15% of GDP, according to the OECD. A shift to fund second and third-pillar pension provision is widely predicted. In a tightening regulatory environment, Italy should become a lucrative region in the rapidly consolidating European custody market.
Over 20 years there have been seven major pension reforms; since the financial crisis in 2008 there have been three further waves of reform focused on mitigating liabilities arising from the first pillar, with measures such as equalising and raising retirement ages.
Pension assets under management (AUM) are quite small at €116.4bn but should rise. In preparation, global and European custodians have made acquisitions in the securities services sector over the past 10 years to increase strategic market share.
On the sell side, domestic banks have been squeezed out of the local custody business by broader capital requirements. Ricardo Lamanna, managing director and head of State Street’s global securities business in Italy, says: “Many banks still need to improve their risk capital ratios.”
In February 2008, Société Générale Security Services acquired the former security services business at Capitalia from UniCredit, which included €102bn of assets under custody, assets under administration in Italy of €22bn, and Italian assets domiciled in Luxembourg worth a further €5bn. UniCredit is still an important bank in Italy but this sale marked its withdrawal from the custody market.
In 2009, State Street Corporation took over Intesa Sanpaolo’s Security Services (ISPSS) business and its main client, Eurizon Capital, which was then Italy’s largest domestic asset manager, with €135bn of AUM. The deal cost State Street $1.87bn (€1.4bn). Tradeable assets under custody at ISPSS were estimated at €343bn, with substantial cash reserves – about a fifth of total assets were held in offshore locations, notably Luxembourg. Another big deal took place in June 2010 when RBC Dexia bought the Italian UBI Group’s custody and administration business by taking over its depositary bank, with some €20bn in assets.
A few months later, State Street won the custody mandate for €43bn of AUM with Banca Mediolanum.
Meanwhile, BNP Paribas was also busy, purchasing Banco Popolare di Milano’s (BPM) depo bank with €20bn of assets under custody. The deal reportedly cost €55m. Most of the AUM in this deal came from Anima and other asset management companies wholly or partly owned by BPM. RBC Dexia, meanwhile, has also been building market share, buying Unione de Banche Italiane’s (UBI) custody business. The deal cost €93m for €19bn, mostly belonging to UBI Promenica, the bank’s asset management division.
There have been other deals and departures, with most Italian banks leaving the domestic custody market. In a sector where personal relationships still matter, there has been competition to recruit those with appropriate contacts. However, captive assets, particularly domestic bonds, remain to be custodied in-house.
There has been similar activity in the local fund administration industry. Claudio Pinna, head of consulting at Aon Hewitt in Italy, notes that Accenture and Permanente dominate the market. Accenture almost certainly has the larger market share, with pension clients including Fondo Cometa, Italy’s largest pension fund.
There has been a steady flow of mergers and acquisitions among smaller administrators, too. Recent deals include the effective takeover of Italian fund service provider Servizi by Luxembourg-headquartered European Fund Administration in 2008-09. The tie-up is no accident – Italian private investors have an appetite for Luxembourg SICAV funds. Not long after, the London-based technology specialist Xchanging purchased Milan-based AR Enterprises, a leading provider of software consultancy to the asset management and brokerage industry, via subsidiary Kedrios. Xchanging, meanwhile, has significant market share in Luxembourg.
“Italy used to embrace a vertically integrated business model, silos which held bank, insurer, asset manager, security service provision and depo bank,” says Pinna. “But this is disintegrating very rapidly.” Big outflows of capital to Luxembourg and Switzerland and EU regulation have forced the opaque Italian financial services industry to make structural changes. In July 2008, the Bank of Italy called for extensive changes to the corporate governance of the industry, including bringing independent directors to the boards of asset management companies and their separation, at a corporate level, from the banks that often own them.
For the custodians and administrators, much depends on future pension savings. There remain some very large pre-1993 ‘pre-existing’ defined benefit pension schemes, particularly for bank and insurance company employees. In 1995, new joiners and those with shorter service in these funds were transferred to defined contribution schemes. “The state pension remains very important for many lower-paid Italians,” says Pinna. “Contribution rates are lower than they should be and politicians have failed to make the major changes we need.”
There are half a dozen domestic depo banks that have not yet been sold to larger custody banks. Their business can hardly be growing but still account for billions of euros, including pension contributions from the pre-existing schemes.
“There are not so many businesses to be sold here,” says Lamanna. A large part of the first and second pillar is exempt from the requirement to use an independent custodian; a majority of pension assets are also exempt from this requirement.