ITALY - Italy's pensions market is experiencing a strong divergence between the closed occupational part of the industry and the open funds which sell their products to everyone.
Recent research has shown that the contractual pension funds set up in particular industries and by individual companies are much less expensive for their members than the private plans for individuals on the open market.
The question of the costs of the two varieties of funds is an important issue because the two will enter into direct competition in less than two years. The law which introduced private pension funds in Italy stipulated that members of contractual occupational funds cannot move to an open fund for a period of five years from the moment they join. This was established to give the closed funds time to achieve a critical mass of assets.
Fonchim is preparing for the direct competition by transforming from a fund with just one compartment into a multi-strategy fund which will offer three different investment lines similar to the products available on the open market. The costs of the contractual funds are likely to increase as they introduce more sophisticated investment strategies. But for the moment the closed funds are more competitive than their open rivals.
Assoprevidenza, the Italian pensions industry association, published a report on the open fund market in June. In 2001, 64,000 individuals acquired a pensions product from one of the 72 open funds bringing the total to nearly 300,000 members and just under E1bn of assets under management. That compares to more than one million members for the 41 contractual funds and E2.3bn of pensions assets being managed.
The industry association said that about 30% of the open funds have outsourced management of their pensions assets compared to all of the contractual closed funds.
It reported that average commissions for open pensions products were 2.1% a year and 0.98% on the income earned in a year. These costs are significantly higher than the closed funds which have larger economies of scale and pay lower fees because of the fierce competition to win administration and money management mandates. Covip, the Italian pensions regulator, estimates that, on average, each member of a contractual fund pays E17 in commissions: E14 for the administration and just E3 for money management.
However the biggest controversy in the Italian market is the astronomical front-end charges on private pensions plans, otherwise known as piani individuali pensionistici (PIP). The average front-end charge is 23.8% but commissions as high as 80% of the first payment have been reported. The costs involved are already thought to be a big brake on growth of private pensions and will be a disincentive to members of closed funds looking to move to an open pension plan when the compulsory five-year period is over.
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