The Italian retirement system has undergone important changes in the past years and more are still to come. Even the governor of the Bank of Italy Mario Draghi during his closing speech on 31 May 2006 at the bank’s assembly indicated retirement reforms as one of the most important changes that Italy has to make. A major reform will soon take effect: the transfer to the complementary pension system of approximately €15bn a year coming from the TFR (trattamento di fine rapporto). According to statements made by the new government this should be implemented in 2007 or at the latest 2008.
As of today though, the state system is still the main source of retirement income (around 95% of pensions are paid by INPS and public entities). The complementary system is in fact very young. The first Closed End Pension Fund was founded only a decade ago after the passing of the Decreto Legge 124 in 1993. The total number of members (1,146,735) is low and the assets under management are only €10bn but rising quickly.
Although many pension funds were created before 1993 (some in the early 1900s), called pre-esistenti (pre-existing), they represent only a small number of workers, around 650,000 compared to 1,553,757 in the newly constituted pension funds and 818,000 life insurance policies. They have a total of €30bn of assets under management.
Total pensions paid by newly constituted pension funds and pre-existing funds do not reach even 1.5% of the total.
Professional schemes (Enti Previdenziali) are another private form of retirement scheme but they are first pillar therefore compulsory. In fact, as in many countries in Europe professional schemes are a peculiarity, performing a vital role on the pension stage. Their importance vary across Europe, but in Italy their implementation and privatisation has been a success. Today they pay 3.7% of total pensions in Italy.
Most Enti Previdenziali were created as public entities, some of them over half a century ago. In 1994 they were privatised and later, with the Decreto Legge 103 of 1996, new private entities were founded. They decided to provide a compulsory public service but with a private basis, explicitly renouncing state help in case of deficit.
Today, they have 1.3m members representing over 70% of Italian professionals and close to 6% of the working population. Their assets under management are around €30bn representing close to 40% of total retirement assets in the country.
Average annual growth rates for professional bodies have been generally positive (+2.4% in 2004 and +5.3% in 2003) and the ratio of workers to retirees is around four (in the public system it is around two) and actuarial forecasts say that demographic ratios will stay in equilibrium for another two decades. Of course, a demographic growth close to zero, a continuously increasing life expectancy and increasing professional life will probably have the same effect on the Enti as the changes taking place in the public sector.
In order to tackle this aspect the Enti have been reforming their retirement systems and have modernised their asset management structures.
Some of the Casse previdenziali have decided to merge their associations such as the Ordine and Cassa dei Ragionieri with the Ordine and Cassa dei Commercialisti; others have increased the level of contributions to the Casse, and/or to increase the retirement age. Some changed their system from defined benefit to defined contribution type arrangements.
Each Ente decided independently ways to improve the management of their portfolios but the general approach has been to strengthen their finance department and to hire external professional consultants and risk managers. The broad effect has been improved governance, an increase in the diversification of their strategic asset allocation, a more efficient investment process and selection of the investment methods and tools (through external professional asset managers and/or directly on the capital markets).
Before 1994 the Casse Previdenziali invested de facto only in real estate (some of them had up to 80% of their assets in this
class) and Italian government bonds. Today, with the privatisation and the demographic imbalances they are facing, they have adopted a more modern approach to their liabilities. Although their tactical asset allocation is generally still very reliant on real estate and fixed income products (these two asset classes compose an average 70% of their portfolio equally split between them) they have gradually diversified into pan-European fixed income, inflation linked bonds, pan-European, US and Pacific equities, into alternatives, commodities, private equity, and so on. Today some Enti have up to 18 asset classes in their strategic asset allocation. This ongoing process has resulted in architects, engineers and doctors receiving the IPE Award for Best Italian Pension Fund in the years 2002, 2003, 2004 and 2005 and last year the IPE Award for Best Portfolio Construction in Europe.
Today, the Enti identify themselves as non speculative institutional investors and are taking seriously their role in creating a more efficient allocation of capital in Italian capital markets. As Beniamin Friedman said the longer investment time horizon of retirement savings create positive effects on the economy. Even Draghi pointed out the necessity to replicate the US pension funds model which has a dimension equal to a third of the GDP and 42% of total contribution to venture capital (compared to a 3% in Italy).
Another structural change and challenge for the professional bodies will be the creation of a complementary pension scheme. With the Decreto Legge 243 of 2004, the Enti were given the opportunity of creating their integrated pension funds. AdEPP (the Associazione degli Enti Previdenziali Privati) is currently studying this project. With its 1.3m members and another potential 5m including families and employees, it could be the largest pension fund in terms of members and in time, the largest Italian pension fund in terms of assets. As of today it is not clear if the professional bodies prefer this option or if they prefer to create their own fund. Some have a large enough membership base to go alone but not all of them.
What seems to be clear is that the management of their assets will have to abide to the same rules as the new pension funds, which means (as of today) no direct investment in real estate, no investments in hedge funds and investments will only be dealt through professional asset managers. This will be a big change for the Enti Previdenziali Privati.
Andrea Canavesio is a partner in MangustaRisk, based in Rome and London
Sources: ‘Il sistema previdenziale delle professioni’, January 2006; Alberto Brambilla (undersecretary of the Ministry of Labour) and Prefazione by Maurizio De Tilla (President of Cassa forense and AdEPP)
‘Previdenza Complementare: Aspetti quantitativi’, February 2006; Covip
Articles by Giuliano Cazzola, Elsa Fornero published in ‘Il Sole 24 ore’ (the most important financial newspaper in Italy). Balance sheets of the Casse Previdenziali detailed by MangustaRisk