Just like the trash that keeps piling up in Naples and Campania, nobody is really certain where Italy’s pension system and market are heading. The first pillar continues to cripple the country’s growth and public finances, and attempted reforms usually bring down governments.

However, the situation has improved, primarily because of the TFR reform of 2006. The TFR, or trattamento di fine rapporto, is effectively a severance pay that is given to all employees once they leave their job. Under the law, employers put an amount into an account every month, and upon a worker’s retirement or decision to leave the firm, they are given the sum of all deposits. Prior to the reform, the TFR was separate from pensions, but the new law has decreed that this money can be invested in a pension fund and effectively gave birth to Italy’s second pillar.

However, the number of people deciding to take advantage of the reform and put their TFR into a specific pension fund were limited. Those who do not choose a fund have their money automatically placed into a public fund called the National Social Security Institute. By Italian pension standards, the number of people who made an active decision was encouraging, but it was still far lower than had been hoped. The first year after the reform, only about 35 per cent of Italians made an active choice.

Yet, despite the low take up, assets in second pillar funds have increased dramatically. Previmoda, the €240m fund for the fashion industry expects to collect €100m in contributions this year, compared to an average of €25m in previous years. Eurofer, the €300m fund for railway and transport workers, saw its membership rise 38 per cent last year and expects it to double this year to have a total of 100,000 members.

Previndai, a €3bn scheme, has seen its annual contribution rate increase from €240m to €490m, something its general director Franco Di Giovambattista attributes directly to the TFR reform.

He says: “Previndai members responded with a strong participation, conferring to the fund the part of TFR that until now was not destined to pension schemes. Even non-Previndai members have shown interest in the fund. The fund’s overall capitalisation will begin approaching €4bn.”

However, despite this encouraging growth, one of the most fundamental problems with the Italian system is its emphasis on investment regulations. Some systems, like in the Netherlands, have stringent rules but still allow for a diverse spectrum of investments. However, Italy’s rules are especially tough on alternatives and, as a result, many funds are bond heavy with remaining assets in equities and cash.

Hedge funds remain strictly prohibited and certain real estate moves are also barred. But progress has been made in recent years and now Italian funds can invest in private equity and indirect real estate.

Fiduciary management, according to consultants at Prometeia, Giampaolo Serra and Andrea Nanni, remains something the Italian market is simply not prepared for.

Eurofer, Previmoda and Previndai, along with probably the rest of Italian pension funds would like to make allocations into other asset classes, but the rules make it very difficult to go as far as many would like.

This has severely hindered returns. While most funds gained in 2007, which, given the investment climate, is an achievement in and of itself, returns were very modest with most ranging from between 1 per cent and 5 per cent. Previmoda’s director Marco Lucchini places part of the blame for his fund’s 2007 returns of 1.96 per cent on a restricted asset universe.

He says: “I think having exposure to alternatives would be very useful. We are waiting for a new law that will open up investments in asset classes such as hedge funds.”

Progress on investments has been made. The fractious government has been making the right noises, indicating that the system is set for an overhaul. The ministry of labour has publicly declared the current regulations “outdated” and said it should adopt a system closer to that of the UK or the Netherlands. As Massimo Capuano, president and chief executive of Borsa Italiana explains in an interview (see page 22), the TFR reform is helping to boost more of an equity culture within Italian institutional investors who have traditionally gone for bonds.

Furthermore, efforts are underway to solve the most problematic pension demographic, which has been the under-26 set. The Italian asset management association, Assogestioni, has called for a second pillar scheme to be created, specifically designed for this age group.

Much will depend on the new Berlusconi government’s ability to enact reform. While the first pillar remains an area that most politicians dare not touch, one strategy could be to build up the second pillar and get Italians used to the idea of an alternative method of retirement.

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