Our Insights

Why the launch of individual retirement plans in Italy is a big deal

New individual savings plans create opportunities for asset managers

Italy's new individual retirement plans, known as "piani individuali di risparmio" (PIR), are an important element of the government's efforts to channel individual savings into economically productive investment. The plans resemble individual savings and retirement accounts in the US and the UK. They are being launched at a critical time for Italians, whose enthusiasm for Italian bank bonds and shares—once thought to be a risk-free retirement product—has plummeted.1

The launch of PIRs represent an opportunity for asset managers in Italy and from abroad to gain a foothold in the fastest growing segment of the EU's third largest market for savings.

Key Insights

  • With the tax benefits this new vehicle offers investors, Italy-based asset managers have an opportunity to broaden their activities following the introduction of PIR
  • Asset managers with qualified representative offices in Italy qualify as PIR service providers
  • The plan has the potential to reshape the Italian management sector as a whole

Targeted  Exemptions

In approving the Budget Act 2017  (Legge di stabilità 2017),  the Italian Senate gave asset managers a mandate to establish tax-exempt investment plans at no extra cost for individual retail investors.

Under the new law, PIRs are exempt from the 26 percent substitute tax on capital gains and other financial income generated by individuals in Italy from investments in the plans. To qualify for the exemption, long-term investment savings plans must be held for a minimum of five years and be at least 70 percent invested in equity or debt issued by Italian companies, EU companies with an Italian branch, or shares in UCITS that comply with the requirements.

In addition, 30 percent of the issuers of the equity or debt must be in small and medium-size enterprises (SMEs), and each investor may not invest more than EUR 30,000 per year or EUR 150,000 on the aggregate via an investment manager, a life insurance company  or under a capitalization contract with a professional financial intermediary.

Finally, investments in individual securities are limited to 10 percent of the portfolio.

Exclusions apply to financial income or capital gains where investors hold a “qualifying interest," such as when a holder's voting rights exceed 20 percent or 2 percent for listed companies, or whose stake exceeds 25 percent or 5 percent for listed companies.

Downside Protection Benefits

Despite the restrictions on eligible funds, Italy's retail investors stand to benefit from holding PIRs because the tax treatment for the funds also offers some downside protection.2 Capital losses generated through the disposal of financial instruments and the reimbursement of financial instruments held in the savings plan are deductible from capital gains or proceeds from subsequent transactions within the plan for tax purposes.

In countries where similar plans exist, they have become significant investment structures for encouraging private individuals to save for their retirement

In countries where similar plans exist, they have become significant investment structures for encouraging private individuals to save for their retirement. As elsewhere in Europe, Italy needs to encourage more private retirement savings because the country's pay-as-you-go state pension system falls far short of being able to cover the cost of caring for an aging and long-lived population.3

Diminishing Role for Banks

The timing of the launch of PIRs is significant. Italians, who traditionally focused their savings on institutionally managed investments in bank bonds and government securities, have seen yields on these evaporate as interest rates fell and as the ECB began buying large amounts of government debts securities. Furthermore, structural changes to the banking system, including new bail-in rules for bond holders, are making bank bonds less attractive for retail savers.4

As the role of banks in long-term savings products for individuals diminishes, it is growing for mutual funds, life insurance policies, and pension products that offer a more diversified range of investments. These now account for around 27 percent of household portfolios—their highest level in 20 years.5

The tax advantages of opening PIRs are likely to encourage this trend further, creating an opportunity for asset managers to grow their presence in Italy's profitable retail investment market. The declining role of banks in serving the retail market is also generating opportunities for independent financial advisers to sell a range of flexible and multi-asset products to this new market.6

A Timely Product for Asset Managers in Italy

The opportunity is not just for Italy-based asset managers. PIR plans may be created by non-Italian entities, as long as they are licensed to provide asset management services through an Italian branch or on a cross-border basis, and appoint an Italian tax representative. In addition, non-EU, non-licensed asset managers may act as advisors to licensed asset managers, which could help to support innovation while maximizing investment choices for retail investors.

PIRs represent a timely new product as Italian retail investors recognize there are new ways to make meaningful, tax-advantaged long-term investments

What is increasingly clear is that PIRs represent a timely new product as Italian retail investors recognize there are new ways to make meaningful, tax-advantaged long-term investments.

The restructuring of Italy's asset management business is already fully underway as Italian banks begin unwinding dedicated arrangements with asset managers in favor of distribution agreements, while asset managers look to consolidate with an eye to offering a wider range of strategies to service this flourishing retail segment.7

With assets under management of around EUR 1.9 trillion8 in Italy and growing, the introduction of PIR plans may encourage the expansion of existing asset managers' Italian desks, and entice new entrants to the market. As more of Italy's long-term savers accept the need to change how they plan for their retirement, the opportunities for asset managers to meet this demand will also increase.


References

  1. This is Money (October 26, 2016) Why we should all worry about Italy's stricken banking system
  2. Elexica, (February 1, 2017) Long-term individual savings plans now available to asset managers in Italy
  3. BBC News (August 17, 2007) Guide to Europe's Pension Woes
  4. This is Money (October 26, 2016) Why we should all worry about Italy's stricken banking system
  5. Prometeia (April 27, 2016) The 'new normal' for savings in Italy
  6. Lexology (December 12, 2016) Italy introduces tax-exempt individual investment plans
  7. Financial Times (December 16, 2016) Once in a Lifetime Deal' for Amundi and Pioneer
  8. Assogetioni (March 2017) The Italian Asset Management Market - Key Figures