June 2008


The Italian pensions market is potentially one of the largest markets for fund managers in Europe. But it’s also one of the most difficult. Nick Fitzpatrick assesses the risks ... italpensions.jpgItalian policy makers are having a difficult time with their pensions policy. Like countries elsewhere, Italy wants to reduce the state pensions burden and encourage the public to save more for retirement. A regulatory change, which has the potential to deliver e100bn to asset managers over the next ten years, has tried to kick-start this shift.

The change centres on the 7% of salaries that Italian workers have historically contributed to the TFR, a social security scheme designed to help them buy homes and fund medical expenses. Last year the government passed laws designed to channel these contributions into pension funds.

The rules meant that this money would default to occupational pension schemes if employees did nothing to prevent it – but many of them did, and they continued to prioritise their property dreams over their retirement plans. Consequently, the change is deemed to have initially failed, but it is still early days.

Promote understanding
Claudio Pinna, a managing director at Hewitt Associates, the pensions and investment consultancy, says: “We need to change the mindset of Italian employees. They haven’t understood that pensions coverage provided by the state is less now than it was.”

Livio Mocenigo, head of the Milan office for Watson Wyatt, would agree. He says that despite plans to increase the state pension, in the long run, the state pension is withering – a fact that many workers fail to realise.

Making matters worse, there is only a ‘thin’ market for supplementary pensions to replace it. The supplementary system is driven by industry-wide pension schemes, but Mocenigo feels that more company-sponsored plans linked to corporate culture and objectives are needed.

However, there is optimism that following Italy’s general election last year, which delivered a majority to the government for the first time in over a decade, pensions will be a major political focus. This is partly because economic growth is hugely important to the Italians: they have the second largest public deficit in the world as a percentage of GDP, with pensions a large contributor.

Mocenigo says: “Italy is a large economy but it is very sick and growing the economy is very important. We are one of the wealthiest countries in the world to have not put our public funds in order.”

The €10bn a year from the TFR contribution, together with a broader increase in occupational pensions savings, would be a great boost to asset managers in Italy.

“The Italian asset management industry is experiencing a difficult time, especially on the retail side,” says Claudio Bocci, who manages the financial intermediaries business for Prometeia, a consultancy with a large market share in Italian pension fund advisory.

From the consultancy perspective, there are signs already of new opportunities for managers with the right product offering for the institutional space. Proposals for regulatory changes are expected to see occupational pension schemes move away from benchmark investing and take more risk, while another change should allow schemes to invest in hedge funds.

Both changes are to Decree 703, published in 1996, according to Bocci. But some pension schemes are already seeking greater sophistication and it is foreign asset managers that appear to be winning more business from this trend, Bocci says. “From 2005 to 2007 we saw a trend in absolute return mandates with specific targets over Libor or Euribor,” he adds.

Eurizon, with €45bn of assets under management and gross inflows of €6.1bn in 2006, is the largest Italian manager. Foreigners include Legg Mason, the US manager, which announced last month that it plans to open an Italian office, and Threadneedle, the UK manager, which did the same in April.

Non-Italian managers
Threadneedle aims to be a top-ten asset manager within three years by targeting family offices, private banks and other clients besides pension funds.

Mocenigo, at Watson Wyatt, says: “We’ve seen a lot of new non-Italian asset managers coming into the market. They can bring efficiency and expertise.” He says that Scottish Widows Investment Partnership (Swip) returned to the market after exiting from a previous exercise.

Asked about this, Francesca Pilato, country manager for Italy at Swip, says: “Swip has always regarded the development of the Italian pensions market with interest. Over the last two years, we have developed a presence in the Italian market and have three so-called  ‘pre-existing pension funds’ [pension funds existing before a juridical reform in 1995] investing in our specialised equity and bond funds.” Pilato says Swip will continue to focus on single asset class mandates, absolute return mandates and mutual funds for the Italian pensions market.

Watson Wyatt’s Mocenigo also registers opportunities in pensions using his own consultancy experience. “In the past few months we’ve been asked to quote for investment mandates in five cases, on asset allocation and on manager selection. In the previous year we were asked only once.”

At Hewitt, Pinna says his business has expanded from three people to 15 in the past year.

The pensions story should be enough of an inducement for foreign firms. Even if retirement savings levels are not as high as policymakers desire, it is worth keeping in mind – as Christian Pellis, Threadneedle’s head of European distribution says – that Italy has one of the highest savings ratios in Europe.

The €10bn a year from employees into the TFR account is largely responsible for that. What matters is to guide that into occupational pension funds. The government is clearly trying, but a lot of details about further pensions initiatives are unclear, say consultants.

Pilato, at Swip, says: “Over the long term, we expect it to be a very interesting market, although the shorter term is more difficult to forecast: while the potential for the market is strong, any delay in decision-making and implementation by the government could hold back the pace of development.” ©  2008 funds europe

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