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Solid investment for self-employed professionals

The national pensions and benefit fund for Italy’s self-employed architects and engineers, Inarcassa, has e2.3 billion under management. Since privatisation in 1995, it has been upgrading its systems and financial management to compete independently, without state support.
Investment strategy is determined by a national delegates’ committee, consisting of some 200 members, which meets quarterly. The delegates’ committee also nominates the 11 members of the board of directors, which meets monthly to oversee administration and the staffing of senior positions.
With a total staffing of 2,000, the scheme handles most areas of activity inhouse, including IT, accounts and administration management, and financial and real estate asset management and administration. Professional areas outsourced include cash management, the collection of contributions and disbursements. Activities that require specialist knowledge and skills are also generally outsourced, although the scheme aims to do this by means of partnerships that allow it to work jointly. Partners include firms specialising in niche areas of asset management, actuarial assessments, and economic analyses. Depository bank and custodian activities are also outsourced to one bank, which remains totally independent of the fund’s financial managers.
Of a total potential client base of 280,000 self-employed professionals in engineering and architecture, there are 100,000 active members of the scheme, and only 10,000 retirees and 3,300 deferred members. The customer profile is quite young: 45% of the architects who are members are under the age of 40, compared with 35% of the engineers. Around 60% of turnover is concentrated in this age group. Some 20,000 members contribute solely for supplementary cover, since they have mandatory cover elsewhere.
All products are defined benefit, with payments determined according to income and length of service, leaving aside contributions and rates of return from investments, although a minimum payout is assured. Members pay in the equivalent of 10% of salary or 3% of income; supplementary cover contributions are based on 2% of business volume. Inarcassa pays out pensions and benefits for both retirement and assistance, including disability, invalidity, maternity leave, and indirect payouts.

Asset liability modelling
Asset liability matching serves fundamentally to determine return objectives based on the financial management of assets. This is particularly applied to inflation-linked bonds. To undertake ALM, technical actuarial positions are calculated at least every three years, with a 40 year projection time-span.
The hypothetical situations used include: assessing individuals’ payouts and contributions; calculating payouts according to the salary structure; financing the distribution of funds; pensions requirements; and demographics.

Investment strategy
Since privatisation in 1995, Inarcassa has introduced a structured investment process for all classes except property to reduce the fund’s exposure to risk. This structure of strategic asset allocation is based on a CAPM model implemented using the Markowitz portfolio theory. The fund relies on stability provided by: returns on investments satisfying economic sustainability objectives, using asset liability modelling; risk tolerance; standard and value-at-risk variations; and investment classes. Relative and sub-division benchmarks are selected according to their ability to be replicated. Tactical asset allocation is dependent on over- or under-exposure of each asset class to a delta of 5% relative to the strategic asset allocation as well as market timing.
The fund has achieved a high level of diversity in investment. Of total assets under management, 39% is invested in bonds, with more than 80% of these European, and around 10% North American. Japanese bonds account for 5% and emerging market paper 3 %. Of the 18% tranche invested in equities, the breakdown also favours Europe, with 72%; North America accounts for 22% and Japan 6%. Property is a major asset class, accounting for 27% of total funds under management, and there is also a significant allocation to hedge funds at 9%.

Risk management
Risk management is outsourced. It is based on risk controls both for individual asset classes and the overall asset base, as well as monitoring profits and volatility. A regime-switching model is in use. External asset managers are monitored periodically, assessed on a number of criteria including alpha, Jensen alpha, beta, information ratio, market timing, tracking error, Sharpe ratio, and volatility. Current in-house management is evaluated based on analyses relating to how the decisions of the board are implemented, as well as quantitative surveys taking in the general way business is conducted and the average transaction
times. Due diligence ensures the lawfulness of the fund’s activities.

Highlights and achievements
Although Inarcassa has been active since 1961, the business environment has changed since its 1995 privatisation. It has since updated its financial management, in line with its pledge to guarantee pensions and benefits without recourse to any government subsidies. The new structured investment process is part of this programme. Other
steps taken include switching to a contributions-based structure for supplementary pensions, and amending the regulations governing repayment of contributions.
At the same time, the scheme has cast a careful eye over the services it offers to members. It is planning to total up members’ contributions to guarantee a no-charge pension based on typing up contributions to various insurance and benefits products, and to implement welfare benefits measures.
At the same time, the firm has beefed up member communications. By upgrading the IT system and introducing an intense training programme, the scheme is able to reach an average response rate of 90%. More than half of all customer contacts are made via the internet, compared with 20% by phone and 16% by letter. Inarcassa online, available to around one-fifth of the membership so far, offers a customised interactive service, allowing simulated future pensions calculations, consultation on the position of members’ contributions, as well as online communications and payments.

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