“Until 2006 there was a monopoly in the Italian pension fund industry, where closed funds were the only option for employees,” says Andrea Lesca, managing director of Intesa Previdenza, the leading company in the Italian pension fund industry. “The new rules have started to liberalise the market. The process is slow and sometimes cumbersome, but it is moving. We welcome the new scenario and we do not consider 30 June as the end of the change. On the contrary, it is only the beginning.”

Intesa Previdenza belongs to Gruppo Intesa Sanpaolo, one of the largest financial groups in Italy. According to the national asset managers’ association Assogestioni, Intesa Previdenza had over 100,000 individual clients at the end of 2006, the highest number among providers of open pension funds - those that are sponsored by banks, insurance companies or asset managers.

With the new rules, effective from January this year, open funds are no longer restricted to the self-employed. They may also recruit employees through collective bargaining agreements signed between employers’ and employees’ representatives, who do not have to be union activists. Intesa Previdenza is exploiting this opportunity, offering its pension fund, PrevidLavoro with four investment options: linea bot+ (no risk, short-term horizon), TFR+ (guaranteed return), bilanciata (balanced between cash, bonds and stocks) and azionaria (up to 100% stocks). Already around 150 companies have selected Intesa Previdenza as open pension fund provider for their employees.

But what about the unions, whose power will be weakened if many of their members opt to put off closed funds in favour of open funds? “The unions’ reactions have been mixed, some hostile, some not,” Lesca says. “There are union officers who do not demonise open funds but want to know more about them. Also, some of them agree to offer open funds in addition to the closed one in their industry, in the interest of workers. We co-operate with them in some situations.”

Intesa Previdenza is focusing its marketing campaign on the medium to large-sized companies of the market: companies with more than 50 employees or the ones that under the new rules will lose the TFR anyway. “Among these companies there are several multinationals, which have hired advisers to select two or three providers for their new individual pension plans,” Lesca says. “It is a positive move, because these multinationals are fostering the introduction of international standards in Italy. The screening and choice are based on criteria such as the organisation and financial solidity of the provider, the track record in asset management, performance adjusted by volatility, costs, and quality of service.”

Advisers collect data through questionnaires and they ask four or five providers to give a presentation in a meeting with the company. “If the agreement to offer employees the new individual pension funds is signed by local unions, their representatives sometimes attend the meeting and participate in the selection,” Lesca continues. “Most of the multinationals’ employees had not enrolled in the closed funds, but now they are joining the open ones, and thanks to collective agreements their companies will make contributions to the individual accounts.”

According to the Lesca, joining an open fund through a collective agreement saves money for both companies and employees: the latter pay lower fees compared to the retail individual pension plans, and companies do not have to bear any administrative costs, which are required for some closed funds. To compare costs among different open and closed pension funds, a so-called concise cost indicator - a sort of total expense ratio - explains how much an employee will pay in two, five, 10 and 35 years based on his contributions.

Each provider has to elaborate and publicise this indicator. “However costs are not the only factor in the selection of open fund providers,” Lesca points out. “Companies pay a lot of attention first of all to the reliability of the holding financial group. Second, they check the potential providers’ availability to keep talking with employees, answering their questions directly. Both employers and employees want somebody who will be there to solve doubts and concerns.”

Financial advice is highly prized and Intesa Previdenza offers it on its website to its clients, who can access it with a personal password, check their account and switch investment options any time. “Moreover, we plan to organise general meetings at least once a year in each company where we are providers, in order to explain how the funds are going and answer employees’ questions,” adds Lesca.

A peculiarity of the new Italian rules is that each pension fund must offer an investment option that is ‘guaranteed’, namely the default option for employees who do not make a choice. This option is required to return the entire capital for when a member needs money in advance, and has to provide a minimum annual return. Foreign operators have pointed put that this is an expensive burden for its clients.

PrevidLavoro’s guaranteed investment option, TFR+, offers a minimum of 1.8% per year compounded. “Its objective is to beat the TFR interest rate in the medium term - five years,” Lesca explains. “The problem is that guaranteeing a minimum annual return can conflict with beating TFR in the short term.” With annual inflation at 2%, for example, the TFR return is 3%.

The fund’s chosen solution is Epsilon’s quantitative investment strategy, says Lesca. Epsilon is a quant manager belonging to Gruppo Intesa Sanpaolo, founded by Alessandro Penati, a finance professor at the Universita’ Cattolica, who remains its chairman. “The TFR+ portfolio is designed to reach an absolute return, while controlling risks,” Lesca says.

Epsilon, which has managed all four PrevidLavoro portfolios for the last three years, with total assets of €8m, applies probability models, risk immunisation strategies and micro-selection of securities to improve relative value.

The biggest difference between open and closed pension funds is in governance: half of the board of closed funds is made of employees’ representatives, while the boards of open funds consist entirely of financial managers. “However, we are devising means to involve employees,” Lesca says. “For example, we are discussing how to create a sort of supervisory board of the open pension fund, made of representatives of employees from companies where more that 500 people have joined PrevidLavoro.”

So far Intesa Previdenza has not had to face competition from foreign pension fund providers because, according to the current rules, an open fund must be based in Italy. “Foreign managers did not have time to set up new Italian operations to get into this first phase of liberalisation,” Lesca says. He is also a little sceptical about the campaign launched by the Italian government to publicise pension funds.

“I don’t think it has had a great impact. The Italian social security (Inps) sent all employees their individual situation together with a heavy pamphlet about the reform, which was very difficult to read and mostly ignored. The television adverts at least raised some curiosity. The problem is that people still do not know what all pension funds are. Generally speaking, there is very little financial education.”

The public need for information is confirmed by traffic on the internet. “In the last few months our website has experienced thousands of visits a day,” Lesca claims. “But as I mentioned already, people prefer talking with somebody, although not anybody. This is why we have not created a call centre for our clients.”

What concerns Lesca is that at the beginning of June, less than a month before the deadline for decisions on the TFR, the Italian pension authority COVIP had not yet issued the rules about financial forecasting.

In the new system, providers should be able to elaborate a so called progetto previsivo esemplificativo - an example of future pension fund benefits - which can be compared to an employee’s likely benefit from the public system pension. COVIP’s rules should define how to simulate inflation rates, financial market performance, the impact of cost and so on, in order to level the field for comparisons between different providers. “This forecasting is an important instrument, but nobody seems to care,” Lesca says.

Many of the technical details have been defined late in the process of implementing the new system. “No one has had sufficient time to talk with employees and explain the new options, which is unfortunate,” Lesca concludes. “However, the new season of Italian pension funds does not finish on 30 June. We are just starting to warm up promoting them.”

 

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