ROME - New tax breaks on pension savings expected by the year's end could see assets in Italian supplementary pension plans climb to e27 billion by 2005 from e2.1 billion at the end of March, according to recent research by Cerulli Associates, London.
And that growth could lead to increased opportunity for foreign investment managers.
The widely expected cut in the capital gains tax on pension investments would make pension plans a far more attractive savings instrument in Italy, according to Stephanie Apap Bologna, a consultant at Cerulli.
The Italian government is expected to cut the tax on pension investments to 6% from 11%. Capital gains tax on mutual funds and life insurance products is now 12.5%.
Tax-free contributions to pension plans were introduced earlier this year, but did not trigger a marked increase in fund flows, she said, because the plans are relatively inflexible and incentives were not generous enough.
Employees and employers can contribute tax free into pension plans up to 3% each of the employee`s salary. The self-employed can contribute up to 6% of salary tax free to an individual pension plan.
Italian pension plans are still relatively inflexible, said Ms. Apap Bologna. Assets saved in industrywide plans can only be transferred to other schemes after five years. Because of that, most people to date have preferred to save through mutual funds, despite the tax breaks on pension contributions.
But she expects the cut in capital gains tax to encourage investors to overlook the inflexibility.
Industrywide pension schemes likely will attract the lion's share of new assets. There are 40 applications to set up industrywide plans waiting to be processed; only 23 plans were in place as of December 2000 (more recent figures were not available).
Investments in mutual funds have to date dominated Italy's long-term savings market. The expected growth in the pensions industry will trigger rapid growth in the overall mutual fund industry, where assets could exceed e1 trillion by 2005 compared with e560 billion in July, according to Cerulli.
Individuals account for around 80% of sales in the Italian mutual fund industry, but that will fall as pension plans are launched, said Ms. Apap Bologna.
But the size of the Italian pension market will be constrained until the Italian government allows employees to transfer a company-sponsored, lump-sum retirement payment into a pension plan, said Roberto Vedovotto, managing director of sales and marketing for southern Europe at Morgan Stanley Ltd., Milan. At this stage, only employees who have joined the work force within the past six years can channel their lump-sum payment, known as Tratamento a Fine Raporto, into a pension plan. The bulk of TFR payments remain as book reserves held by sponsoring companies.
Opportunities for non-domestic money managers are expected to grow rapidly because investment performance by domestic banks and money managers has been disappointing since early 2000. Demand for foreign-domiciled mutual funds, particularly those based in Luxembourg, also will grow faster than domestically domiciled funds, said Ms. Apap Bologna.
Individual pension plans are likely to increase their international equity holdings.
"Local investors are starting to realize that local money managers may not be the best option for managing Asian asset classes, for example," she said.
Rather, local product providers are looking to non-domestic money managers to provide sector based or geographically specific asset classes. At this stage however, Italian pension plans are limited to investing only in countries that are members of the Organization for Economic Cooperation and Development, so opportunities for emerging market specialists might be limited, she said.
Morgan Stanley's Mr. Vedovotto said asset allocation by institutional investors had increased in scope and now included asset classes such as corporate and high-yield bonds and small cap stocks.
"For that reason, there is clearly a need for international managers to be in the market," he added.
Most sales of funds managed by non-domestic managers will continue to take place through third-party distribution arrangements although Ms. Apap Bologna expects demand for segregated mandates to increase as new pension plans are established.