The long-awaited new regulation setting forth Italian pension funds’ investment criteria and limits was finally published in the Italian Official Gazette on 13 November 2014 and came into force on 28 November 2014.
On 17 November 2014, the Ministry of Treasury issued a public consultation on a draft regulation providing for investment criteria and limits that will apply to social security institutions (Casse di Previdenza).
The new regulation on pension funds replaces the previous Ministry of Treasury Decree, which dates back to 1996. Private social security institutions will for the first time be subject to an ad hoc regulation in respect of eligible investments. Such a new regulation is an important step towards the perceived need for a legislative framework governing social security institutions and (largely) replicating the provisions laid down by the recently enacted regulation on pension funds.
The new regulations focus on the implementation of proper risk management and internal control procedures and structures, rather than providing a narrow list of eligible investments. In fact, subject to the criteria and the limits set out in the regulation (in particular, with respect to alternative investment funds), pension funds and social security institutions may invest in any ‘financial instruments’ and may enter into repos, stock-lending and derivatives transactions.
We set out below the main characteristics of the new regulations.
Both pension funds and social security institutions shall act according to the general principles of sound and prudent management (sana e prudente gestione) and cost effectiveness in the interest of the beneficiaries of the fund and social security performances, respectively.
The management capabilities of the pension funds and social security institutions and their internal decision processes will be enhanced. In particular, specific technical and professional structures appropriate for the financial portfolio under management and the investment policies to be pursued, and proper procedures aimed at preventing and managing conflict of interests shall be put in place.
Both pension funds and social security institutions may invest in any ‘financial instruments’ and may enter into repos, stock-lending and derivatives transactions and hold liquidity.
However, repos and stock-lending transactions may be concluded only within a standardised system arranged by a recognised clearing house or with duly regulated counterparties, while derivatives may be concluded only for efficient management and/or hedging purposes.
Short selling is not allowed for pension funds or social security institutions. Lending and borrowing is not allowed for pension funds but admitted for social security institutions within certain limits.
Specific investment limits are set forth for both pension funds and social security institutions. In particular:
- investments in financial instruments which are negotiated in regulated markets shall prevail
- investments in financial instruments which are not negotiated in regulated markets or in alternative investment funds will be limited to 30% of the entire assets of the pension fund/social security institution
- investments in financial instruments issued by the same issuers will be limited to 5% of the entire assets of the pension fund/social security institution and those in financial instruments issued by issuers belonging to the same financial group to 10%
- investments in alternative investment funds, including closed-ended funds, will be limited to 20% of the entire assets of the pension fund/social security institution and to 25% of the value of such alternative investment fund.
The aim of the provisions laid down by the new regulations is to vest pension funds and social security institutions with accurate controls and management of their investment policies and internal procedures, so as to pursue investments diversification, efficient management, risks diversification and maximisation of profits and costs compared with relevant financial risk.
Whilst the new regulation setting forth Italian pension funds’ investment criteria and limits is currently in force, the final provisions that will apply to social security institutions will be published soon (the public consultation on the draft regulation ended on 5 December 2014).