Recent reforms of investment and pension laws in Italy could open up the market to foreign investment managers and custodians. Italy has been a relatively closed shop for securities services providers and a strong universal banking model has enabled the local banks to dominate provision of both custody and asset management.
For more than a decade, Italian governments have talked about pension reform, more often than not defeated by a strong union movement and the inherent weakness of most Italian administrations.
Italy’s generous welfare system, which includes a low retirement age (75% of final salary paid to men at 60), cannot be sustained in the face of a low population growth rate of only 0.9% and a birth rate, according to year 2000 census estimates, of 9.13 per 1000 population.
The generosity of the state system has left the second and third pillars of the pension industry underdeveloped. The Italian government hopes to encourage citizens to invest in pillars two and three by removing the obligation to pay contributions to their employers (which are returned to the employee when he or she leaves the company, with interest paid at the inflation rate).
In theory, the money that goes into this so-called TFR scheme will be freed up to be invested into pension funds. “It is estimated that around e14bn in assets will flow into pension funds following the changes in the investment law that will allow the TFR money to be invested in pension funds. This should give the pension funds industry a big push in Italy, which is still a very young pension fund market,” says Mauro Dognini, deputy general manager, BNP Paribas Securities Services in Milan.
Rowena Romulo, country head Citigroup Global Transaction Services, Italy, is unsure that the reforms will have the predicted effect. “There has been talk about pension reforms in Italy for the past 10 years. One reason it has been held back is that the fiscal implications are not clear. The withholding tax on pension funds is still too high and there is little incentive for people to go into schemes.” Not to mention, she says, that traditionally Italian banks have sold insurance schemes to their clients rather than pension funds because they could gain higher margins.
Even if money does flow into pension funds, will foreign custodians benefit? Mauro Dognini, deputy general manager, BNP Paribas Securities Services, Italy says: “Foreign institutions do have problems breaking into the Italian market. The ‘old’ pension funds, which were formed before reforms made in 1993 do use foreign banks. However, the new funds, which are subject to more regulation and are required to have a depository bank, tend to always pick an Italian bank. It is a bit of a mystery.” BNPSS has two major clients, InarCassa the professional pension fund for architects and engineers, and Previndai, the largest pension fund for managers, or dirigenti.
Romulo also points up that Italy is not a completely closed market. “While foreign banks dominate in the provision of services to non-resident investors in Italy, they have less of a dominant position in the investment management side, such as mutual funds. That part of the market has been more of a closed shop,” she says.
Foreign custodians can also take heart that Italy is implementing the Ucits III directive from the European Commission. In February 2003 the Italian Parliament approved a law establishing the procedural steps needed to implement UCITS III.
Jean-Marc Crépin, vice-president and manager of State Street in Milan says: “The new investment law in Italy is providing a better framework for international asset managers and depository banks to do business. Foreign companies can usually provide more comprehensive information as well as lower cost products.”
With adoption of UCITS III, Italian investment managers will be able to outsource fund administration and depository bank functions such as NAV calculations. This was not previously possible.
“The adoption of the UCITS III legislation will have an impact on our position in the market and on our customers,” says Romulo. “UCITS removes the duplication of activity between asset managers and depot banks, which should result in an overall cost reduction for asset managers.”
With the UCITS III regulation and other forces such as the pressure to reduce costs and the increasing globalisation of investment appetites, Romulo says Italian investment managers will have to invest more heavily in technology. “Some are stepping back and considering whether this is a core business for them. I think over the next two to three years many Italian financial institutions will look to outsource their middle and back office functions.”
Crépin agrees that outsourcing will take off in Italy. “Following the change in legislation, I think more investment managers will outsource back office functions such as NAV calculations and also middle office functions. The outsourcing trend we have seen in Europe will likely accelerate in Italy and State Street is very well positioned to win outsourcing deals in the country.”
The rich seam of possibilities being thrown forward by the reforms in Italy seems endless. In funds distribution there are also signs that the market that was once so strong for local players is being chipped away at by outsiders. Says Crépin: “There is a big push from foreign asset managers to sell their funds to private investors in Italy. Third party architecture is opening up in Italy because local banks understand their clients’ growing appetites for third-party funds on top of their own products and they can take advantage of fund distribution.”
According to a Pricewaterhouse
Coopers (PWC) report of 2004, Italy is one of Europe’s most important mutual funds markets in terms of assets under management. Net assets under management at the end of December 2003 were e519bn. PWC noted that while defined contribution pension funds were beginning to play an increasingly important role, they lagged far behind mutual funds in terms of assets under management.
It is the mutual funds market that is proving to be most attractive for foreign custodians in Italy. There is clearly plenty of opportunity in this sector to make up for the sluggish growth of pillar two and three pension schemes.
Says Romulo: “Italy is a very important market, particularly in terms of mutual funds, but it has been a closed shop. Asset managers have tended to be part of large universal banks and there are very few independent asset managers that use third parties. However, the regulatory changes in Italy and other trends are opening the market up. I think there will be a great deal of activity in the year ahead.”
BNP’s Dognini says the Italian market is booming because of the new laws. “I think there will be other foreign providers entering the market and they will compete. Once the newer pension funds become more experienced in selecting asset managers, opportunities will open up for foreign institutions.”
He is sanguine about the latest spate of reforms, however: “There has been much talk about reform in Italy. But these things usually happen very slowly. There needs to be a fiscal benefit to encourage people to pay into a pension fund. There is some, but it is still not enough.”

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