AVEZANNO, Italy - Texas Instruments Italia SpA converted its profit-sharing plan into a fully diversified defined contribution pension fund.
The company might be the first to change its existing pension arrangements under new Italian pension reform legislation. Final regulations implementing the 1995 law were not issued until this past July (Pensions & Investments, Aug. 4).
Among other things, new legal requirements require Italian retirement plans to invest in a diversified portfolio of securities and hire professional external money managers, explained Fulvio Schizzi, finance director for the wholly owned subsidiary of Dallas-based Texas Instruments Inc. Previously, the Italian subsidiary's self-administered cassa di previdenza, or profit-sharing plan, had been 100% invested in Texas Instruments stock. Now, the plan has been converted into a fondo pensione integrativa, a separate trust fund.
In July, the board of trustees selected Milan-based SIM CoGeF, a joint venture between Banca Commerciale Italiana, Assicurazioni Generali S.p.A. and Fleming Investment Management Ltd., to convert the 39.5 billion lira ($22 million) portfolio into a diversified fund.
Establishing the pension fund's benchmark took a bit of guesswork.
Historically, bonds have outperformed stocks in Italy. But domestic bond yields have been declining with the prospect of Italy joining the single European currency.
Meanwhile, the Italian equity market has changed dramatically, as many state-owned enterprises, such as ENI S.p.A., Rome, have been privatized. The Milan Mibtel Index has soared 44.9% in the first nine months of 1997.
Nor have Italians had much experience investing in foreign markets.
"There was no benchmark from the point of view of an ideal asset mix," explained Hugh Twiss, CoGeF's chief investment officer. "Historical returns probably are not a good guide to the future."
As a result, the benchmark is equally divided between equities and bonds. Within each asset class, the benchmark is split 50-50 between domestic and international securities. The benchmark tracks the relevant portions of the Morgan Stanley Capital International World Index, the Mibtel Index, the J.P. Morgan Government World Bond Index (ex-Italy) and the Morgan Italian Bond Index.
CoGeF has to maneuver within a relatively tight band limiting tactical bets per asset class to within five percentage points of the neutral position.
What's more, the manager's unlikely to beat the spectacular performance of Texas Instruments stock, as the market has reacted to the company's restructuring, which involved the sale of nine units, including its $2 billion defense operations, and purchase of three others.
In the 12-month period ended June 30, the stock shot up 61.8% to 84f. Since then, it has soared to 1331/2, although with substantial volatility.
The pension plan has certain limitations. One key difficulty is it covers only those employees who joined Texas Instruments before a previous pension law change was made in April 1993 - some 800 of the company's 1,850 Italian workers. Subsequent hires have received their profit-sharing payments entirely in cash.
Company contributions have ranged anywhere from 0% to 14% of pay per employee, plus a nominal contribution from employees.
But the new law limits tax-deductible employer and employee pension contributions to 2% each. (An additional 2% transfer from the severance plan is permitted.) The 4% total employer and employee contribution usually is far less than TI's typical profit-sharing distribution.
Thus, employer contributions over the tax-deductible ceiling will be distributed as a cash bonus.
The company now is negotiating with its unions over terms to allow new employees to join the company plan or other pension plans. In Italy, employees are free to participate in non-company plans; many unions are setting up their own vehicles.