On 13 May 2006, Covip, the pension fund regulator, should have issued the new rules for pension funds in accordance with the law of December 5,2005, n°252. But in the meantime the Italian government has changed, as have the responsibilities between the new ministers of labour and welfare. We don’t yet know when Covip will be in a position to define the new rules according to the 252 law, hopefully shortly.
The big question, financially speaking, is still the flow of treatment of retirement (TFR) money – €13bn per year that should flow out of companies’ balance sheets to pension funds to be invested by fund managers or insurance companies into the market according to the Silenzio Assenso formula where the transfer will take place automatically if the worker does not otherwise indicate a preference.
The actual TFR, an Italian peculiarity, that represent an additional 6.9% of an employee’s gross salary, is accounted for as a credit of the workers in the company balance sheet, and re-evaluated each year at 75% of official inflation plus 1.5%. Being a social benefit, it is primary debt for the company, but a low cost financing for medium and small companies.
This is clear to everybody but, the devolution to the pension fund, according to the 252 law, is subject to the condition that the fund will put this money in a line of investment that “guarantees the capital ... and a yield similar to the TFR treatment”. If not, the money will go to a state pension fund in an INPS account!
In reality there are no products in the market that guarantee the capital and the yield at the same time. This is because at any time a fund associate can leave, because of age but also because death, dismissal or simply a change of company or fund.
The biggest Italian fund, Cometa (€2.6bn of invested assets), has already offered a guaranteed investment, managed by two Italian insurance companies, but since the guarantee of a minimum of 2.5% annual yield was at the end of a five-year period, it didn’t yet get the Covip approval. From the draft to the official directive it is unclear whether the flow of money will shift from financial manager to insurance company or to state funds. 1, the new legislation will take effect in 2008 and there are still one-and-half-years to go.
But according to the new regulation funds by law, statute, and organisation will have to change. Public beauty contests will have to be run, managers selected and associated funds informed.
One positive aspect of the new law is that €17m from the public coffers can be spent on an institutional information campaign and an obligation on single companies to inform their workers before the law will become effective on 1 January 2008 and a second time 30 days before the end of the six month period in which the workers can decide about the transfer of TFR.
The information campaign will help increase attention to the second pillar that at the moment only accounts for 3m people, less than 9% of workforce.
If the campaign proves successful, the increase in numbers (the biggest fund, Cometa, has subscription of fewer than one third of eligible employees) and in money (the TFR represents two times the normal employee/company contribution) will necessitate new strategies for investment and an increase in specialists to manage the money.
The same limit on the way money is managed appears in the new law – no leverage, no loans or commitments – so it is still not clear if hedge funds, private equity or other alternative investments will be allowed.
The draft from Covip, simplifies only the approval procedure on assignment of a mandate to a manager and gives more responsibility to the board of the fund. New rules are expected within six months on pre-existing funds, the only ones that can invest in alternative investments and which have assets of more than €30bn.
With regard to the organisation of the second pillar system, the new law introduces competitiveness among closed funds (company or industry sector funds) and open funds (investment fund proposed by a financial institution and insurance company). Employees will be allowed to choose the most attractive fund and transfer the money accumulated. The new rules enhance transparency and disclosure about costs and restriction rules which should make it easier for employees to compare different options.
This may alter the fee system in Italy which has a wide discrepancy between institutional and open funds.
The complexity of different investments in the same fund, the possibility of an associate investing in more than one asset, and the greater flow of money should also open the fund organisation up to professional consultants to assist a board to achieve more complexity and responsibility.
At the end of 2005, the second pillar industry accounted for about 3m people with total invested assets of €44bn, divided into more than 460 funds (old and new) with still limited resources and spending capacity.
The company accounting for TFR is at no cost for the employee – the cost of the pension fund is retained from the contribution, and the associate is informed by law at least once a year with a letter defined by Covip in order to guarantee maximum transparency.
The board, offices, personnel, mailing and communication costs can be very low if divided by a hundred thousand, much higher if only for a few thousand.
And soon people will be in a position to compare cost and performance so that small funds are encouraged by Covip to merge, in order to reduce cost and diversify investments.
But some small funds (in terms of numbers of associates) actually represent a very small percentage of the potential industry sector and some are hoping that with the Silenzio Assenso more and more people could take up the option.
Soon the boards of the fund will have
to decide how to pay out a pension – choosing external insurance companies or setting up a separate financial management and assuming the risk of an ageing population.
I think that the industry is still at an infant stage and increasingly the boards of the funds will have to raise questions and have professional people to give the right and necessary answers.
Stefano Pighini is responsible for coordinating investment policy at Fondo Enel in Rome

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