MILAN - The Italian government has issued the final set of rules required to implement its much trumpeted pension law.
This long-awaited development clears the way for the creation of a slew of new defined contribution pension schemes whose total assets could exceed $50 billion by year-end 2002, industry experts predict.
It also offers domestic and international money managers a golden opportunity to tap into a potentially vast new market.
Issuance of the regulations follows four years of protracted argument between representatives from the banking and insurance industries and members of the Italian government over what these rules should include.
Last month, the Ministry of Labor published a decree governing the registration procedures for the new pension funds and the professional qualifications of those who will sit on their boards.
From Sept. 11, any Italian company or financial institution that wishes to establish a pension fund can register its proposals with the Commissione di Vigilanza, which is responsible for regulating Italian pension funds, explained Christopher Mayo, principal, international consultant, at Watson Wyatt Worldwide in Reigate, England.
Each application should then take from six to nine months before being approved, so the first pension funds should be up and running next spring, Mr. Mayo added.
Since Italy's original private pension law first was enacted in 1993, it has been subject to a series of a decrees that sought to enhance and refine it. However, there often were long delays between each decree as industry groups and government officials argued over the details.
After a hiatus of two years, tax incentives for pension funds were introduced. Then, at the end of 1996, the treasury published a decree that set out the investment criteria for the new funds. These include: that a pension fund should have no more than 20% of its assets invested in cash; no more than 20% in mutual funds or unitized assets; and up to 100% in either bonds or equities so long as they are invested in EU countries, the United States, Canada or Japan.
The latest decree by the Ministry of Labor completes the process.
Taken together, the decrees and pension law allow for two types of pension fund:
"Closed funds" can be set up by trade unions, large companies and other professional groups, but can only be used by members of these organizations.
"Open funds" can be used by anyone, including self-employed workers and those in small companies.
After five years, open-fund participants who are unhappy with their existing arrangements may move to another open fund. Similarly, alternatives exist for those that don't wish to remain with their closed fund.
Trade unions acting on behalf of the chemical and metal workers already have negotiated agreements with their respective employers that allow for the creation of closed funds. Other professional groups such as doctors and dentists are expected to follow suit.
By law, closed funds must appoint one or more independent, external managers to manage their assets. Domestic banks and insurers are vying to win a part of this new business.
Officials at Societa d'Intermediazione Mobiliare di Consulenza e Gestione Finanziaria per Azioni, known as CoGeF, for example, a joint venture created in May 1995 between Banca Commerciale Italiana, insurer Assicurazioni Generali S.p.A. and Fleming Investment Management Ltd. in London, already have talked with most organizations thinking of setting up a closed fund.
CoGeF officials also plan to launch four open funds and market them through the BCI network. These will have asset allocations ranging from one with 75% in equities and 25% in bonds to another with 100% invested in domestic and international bonds, said CoGeF Investment Director Hugh Twiss. "Down the track there may be more diversity," he added.
Much of the delay in the implementation of Italy's pension law was caused by a fierce argument between the banks and insurers over guaranteed minimum investment returns.
Initially, the powerful insurance lobby argued they alone had the right to offer investors their money back together with a guaranteed minimum return of between 2% and 3% per annum. However, the banks now have won the right to offer these products, too. "A compromise has been reached," said Mr. Mayo at Watson Wyatt.
Observers believe Italian banks might be best placed to win retail pension business because of their large distribution networks. Insurers, meanwhile, have closer links with industry and might do better in winning closed fund business.
Some international money managers, however, are skeptical about the opportunities that exist for them within Italy's fledgling pensions market.
"We don't want to be a direct provider," said John Maher, director and head of marketing at Lombard Odier Investment Services Ltd. in London. Instead, his firm is targeting regional banks that already control enormous amounts of money from high-net-worth individuals and general retail clients.
But he's not ruling out the possibility of managing pension money on a third-party basis once the industry has become established.
"Four or five years down the road, we could be managing defined contribution money," he said. "But we'd be doing the international portfolio of a bank that provides defined contribution schemes."