Money is about to flow to the new Italian supplementary pension schemes. This will be music to the ears of those waiting for the interminable proceedings to get to the point where the tap can at last be turned and the new era of pension provision begin.

Getting this far has been more a measure of the need to get there than anything else, including the ultimate test of national resolve, with the dramatic show-down over pensions between the government and the communists nearly resulting in its permanent fall.

The cost of an elegantly greying population to future generations of Italians is fast becoming prohibitive on a gigantic scale. The fact of being Italian and having worked to age 55 could mean a pension of 70% of your retiring salary. However, even the trimming back of the state pension under the pay-as-you-go INPS will still not be enough.

As Koen de Ryck of Brussels-based Pragma Consulting pointed out in recently published evidence to a US Senate committee hearing on pension programmes in Europe: Italy's pension outlays are nearly 60% higher than the EU average."

He told the senators that the country would have great problems maintaining the 3% public deficit required to join EMU. The government had "an almost impossible task because of the current gap for public pensions is already 4% of GDP and is rising quickly, making it difficult to reach or sustain the 3% objective."

But the new system's national significance is not just in cutting back the country's over-generous public pension system. The new pension funds will bring "a supply of oxygen to the real economy and be an impetus to financial markets" in the view of Jean Franco Imperatori, chairman of Rome-based investment bank Mediocredito Centrale.

Speaking at the recent launch of his book 'Pension funds at the crossroads between the state and the market', he said that Italy's stock market was not fully capitalised, pointing to the inadequacies on the supply-side, with the number of companies listed actually falling from 307 in 1996 to 301 in 1997.

"It is patently clear that only through a massive shift of corporate financing from geared capital to risk capital can our companies hope to retain their competitive edge. To achieve this goal resources must be made available to support our firms. Pension funds are the ideal instruments for this purpose." In the medium term pension funds could inject L60,000bn ($33bn) into the financial markets, he said.

The structure of the new funded schemes which will channel these huge flows of money is simple in outline. The arrangements, which can only be defined contribution as far as those in employment are concerned, come in two basic forms the closed or 'contractual funds' and the open funds.

The closed funds are, by and large, restricted to members of an industry or other grouping and usually sponsored by agreements between unions and employers. They could in fact be used by any employer, but because of the stipulated procedures as to how they are set up and run, they could be prohibitively expensive for other than large schemes.

Also, the amount that can be contributed with fiscal advantage is limited currently to around 2% of payroll, which may not be enough to excite employers into action. For some observers this is a flaw that, if not fatal, will certainly inhibit the development of the system from a corporate point of view.

The open funds are run by banks, insurance companies and investment groups, among others, and available to individuals and companies. The aim is to have portability within the system as, after some years, individuals will be able to move the sums in their pensions accounts from one closed scheme to another, should they change the sector where they work, or to move from a closed to an open fund and vice versa.

So far, 11 closed/contractual funds are going through the authorisation procedures, with the scheme for the chemical and pharmaceutical employees Fonchim having been given the go-ahead (see IPE March). It has a potential membership of 160,000, though it is starting with around 65,000 active subscribers. It now hopes to be operational in June, once it appoints investment managers, says investment director Andrea Giradelli.

According to the supervisory authority Commissione di Vigilanza sur Fondi Pensioni (CVFP) in Rome, three of these funds have obtained permission to proceed with collecting contributions from those joining: Fondo for Fiat cadres, covering 17,000 employees; Fondenergia for 45,000 employees in the energy sector (see below), and Cometa, which is the pension fund for the car and metal working industries with 1m employees as potential participants.

"These funds deal with a total of 1.3m workers in the private sector and it is estimated in the next three years as many as 6m workers could be involved in pensions funds," says the CVFP.

Requests for 90 open fund authorisations have been received by the commission, with 56 of these coming from insurance companies, 25 from mutual fund operators, six from banks and three for investment management companies (SIMs). The commission obtained the power to authorise these from the labour ministry last December. "Due to the large number of applications received, the deadlines set for granting them will be impossible to meet," says the CVFP. Around 70 institutions put in their applications on the first day the commission was open to receive these last summer and they are hoping to get the go-ahead soon perhaps by June.

The other players in the Italian supplementary pension scene are the existing pension funds, of which there are reckoned to be around 1,100. Of these nearly 780 have applied to the commission for recognition. But only around 600 of these are subject to its supervision, it points out, since 163 are affiliated to banks and insurance companies and so are to be regulated by their respective authorities.

Under the new regulations, existing funds have an extended period to bring their practices in line with the new laws. But schemes for example that were on a defined benefit basis in 1993 can remain so for members at that time. In fact, this meant that new participants were not able to join these schemes as they stood. However, as Piero Marchettini of Adelaide Consulting in Milan says a number of schemes have converted from DB to DC to include new employees, or introduced DC funds within their DB schemes.

"The new legislation allows defined benefit only for the self-employed, which is a nonsense, as who is going to provide them with such a guarantee?" he adds.

Existing complementary schemes obviously face review and change, as with the new fund moves being made by Fiat.

The two complementary schemes provided by the Montedison group, with some L250bn in assets, are also affected. These are offered to 6,000 of its 13,000 employees in Italy and both schemes date back to 1987. Fiprem, which covers general management and other employees, has 3,000 members out of a potential 5,000 in the group. The scheme also includes 6,500 members belonging to firms not part of the group, and around 4,300 of these are transferring to another national fund.

The other 'dirigenti' scheme, Fipdam, covers all the 750 existing industrial executives in the group. For employees in these two schemes, Montedison will not be participating in funds being set up for the chemical and energy sectors.

The new system requires that closed funds have an independently appointed depositary bank, administration provider and investment management and that these roles be kept separate. So a new asset management marketplacecould be opening up.

Up to the introduction of these schemes, the only pensions available has been the assets of the existing schemes. This has been impossible to put a figure on. Of the 1,100 estimated schemes, around L20,000bn is the asset base of the 150 members of Assoprevidenzia, the Italian pension fund association, many of which are in the financial sector. The remaining 800 schemes are generally thought to be smaller funds.

If the commission is right and around 6m Italians could be in schemes in the next few years, these would account for about 25% of the labour market. If their total contributions work out at around 4% of salaries when the leaving indemnity contributions are included, then, according to some estimates, Italy could be seeing a L150,000bn market by 2005.

As the new closed industry-based schemes get up and running, they will hold competitions for the depositary, administration and investment management contracts, though the asset management can be given to a number of firms.

The asset managers have been gearing themselves for this opportunity. At San Paolo Bank in Milan a new pensions and institutional investment management team has been established to concentrate on this business.

"We have an advantage, as we already manage money here for our own group pension fund, which is the second biggest in the country," says team member Andrea Ferrante. "Already we are being asked to make presentations and we are proposing presentations to clients."

The bank is also applying for permission to run open pension funds. With these the depositary, administration functions can all be combined under its roof. He sees the bank offering a range of funds specialising in different assets. Individuals will only be able to be in one fund at a time, but will be able to switch between the funds run by the bank, or move to other open fund providers.

At Simcogef a family of funds is being readied for the day permission comes through. Sergio Marini, director general of the Milan-based SIM, which is a joint venture of insurer Generali, Banco Commerciale Italiana and Flemings, says:"We are ready to launch our open pension fund, which will have funds with four different levels of risk." The firm originally put in the application in August last year - on the first day possible, along with 70 others. He adds that as a SIM, the firm will be competing strongly for the assets of the closed funds, such as Fonchim. Stefano Grassi, business manager for pension funds of mutual fund group Prime, is somewhat more sanguine: "As far as open pensions funds are concerned, the great thing will be to get started." He is hopeful that things can be up and running by June.

Grassi queries the way the law allows such a plethora of fund groups. "It would have been better to have perhaps one open funds provider per financial group." This would give higher volumes and have lower administrative costs. "The risk is that we will have a duplication of function and sub-optimal fund management. It would be better to give the fund management to the company in a group, with the core competence to manage money."

Of serious concern to these money managers is the extent to which pensions investors will have the knowledge to make the right decisions in the rapidly changing investment scene.

Marini at Simcogef says that the severe decline in interest rates and the rise in Italian equities may have changed the psychology of investors. "It will be very interesting to see where the fund flows are going to be into open funds." Though Grassi can point to the fact that 40% of the group's mutual funds are now in equity investments, he acknowledges that is exceptional for Italy. He suspects that pension investors will be more cautious.

San Paolo's Ferrante says: "We must convince our clients to increase their equity investment, not just the Italian market, but the world market." He refers to the promotional work being done through the Turin-based Assioprevidenza, which is supported by the bank. This non-profit body is actively helping the transition by educational, promotional and advisory activitiers, but without cost to employers and others. "It covers the questions people have when setting up a new fund, or to change an old fund into a new one."

He adds:"The biggest problem in my view is to explain what risk is and what it means long and short term for pension funds."

The need for awareness about using benchmarks in pension fund investment is another area that needs addressing in the Italian context. The recent change in the law requiring banks to include the benchmarks in investment management contracts is a step in the right direction, he considers.

This is also being addressed for pension funds at a more formal level as the Italian Treasury and Parliament appointed the state-owned Mediocredito with the task of drafting a benchmark for pension funds.

Imperatori said that the role of the trustees to funds needed to have information to evaluate the different fund managers and the criteria to judge financial proposals. "This sort of information is a public asset. It is right that a public sector company such as Mediocredito should produce such information," he said.

"This would not entail consulting activity, but producing information for the system and supplying training." The solution the bank is preparing would be open to all the operators in the market. This is likely to be done through a separate company.

"The task of drawing up scientifically valid benchmark criteria to measure the performance of fund management companies plays a major role in raising the degree of market transparency and providing a guide for all those involved in this new context."

Prime's Grassi thinks that the market will take off, but slowly at first. "In the medium term we will see something. But we need greater fiscal incentivisation to get people to think long term."

Of course, with greater economic growth, then resources might be found to cut the high compulsory contributions to INPS."

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