Italian voters’ rejection of Renzi’s constitutional overhaul could make life harder for pension schemes, finds Stuart Stone

What’s happened?

Italian Prime Minister Matteo Renzi has resigned following a referendum defeat on constitutional reform, with voters shooting down plans to place more power in the hands of his government.


He announced that he will be leaving his post having made a commitment to resign in the event of a ‘no’ vote.

The reforms were intended to make the passing of legislation easier and propel Italy towards greater political stability, investor confidence, and economic recovery; although detractors argued that in reducing the size and power of the senate they posed a threat to democracy.

The result comes as little surprise to experts against a backdrop of growing public rebellion against Italy’s political establishment, symptomized by the emergence of comedian Beppe Grillo’s Five Star Movement.

The margin of victory was significantly higher than expected, Renzi little option but to resign

Darren Williams, senior economist at AllianceBernstein says: “As expected, the Italian referendum on constitutional reform resulted in a ‘no’ vote. The margin of victory was, however, significantly higher than expected (60% to 40% on a record 68% turnout), leaving Prime Minister Renzi little option but to resign.”

Paul Brain, head of fixed income at Newton Investment Management, adds: “The result represents yet another significant protest vote from an angry electorate.”

The result is expected to cause a short-term period of political and economic instability, with many speculating that it will trigger an early general election. However, the most likely outcome is that President Sergio Mattarella will appoint an interim Prime Minister until a general election scheduled to be held no later than 23rd May 2018. 

What does this mean for schemes?

Initial market response to the result has been muted, mainly down to the fact that the ‘no’ vote was widely expected, but also because Italy is still protected by the European Central Bank (ECB). Markets had also priced in the likely ‘no’ vote, with Italian equities and bonds performing poorly in the past month.

Italian assets will now attract an additional risk premium

However, Michael Metcalfe, global head of macro strategy at State Street Global Markets says: “The ‘no’ vote increases the chances of an Italian election in 2017, which given the popularity of the Five Star movement and their views on Europe, means that Italian assets will now attract an additional risk premium.”

Renzi’s resignation could halt the efforts made in recent years to stimulate the Italian economy and will likely see the under-capitalised, under-profitable, Italian banking sector come under increased pressure. The EU and ECB may now have to assist in any recapitalisation efforts. It will be as difficult as ever for the government to pass serious economic or banking reforms which will stall efforts to generate the growth necessary to stabilize public finances or ease investor concerns about Italy’s membership of the euro.

What should investors do?

Long-term investors should avoid knee-jerk responses to the latest jitters in the Eurozone. Philip Dicken, head of European equities at Columbia Threadneedle Investments, says the result will not necessarily accelerate the break up of the bloc.

We don’t interpret the vote as materially changing the outlook for Eurozone policy

He says: “We don’t interpret the vote as materially changing the outlook for Eurozone policy. We do not see the result as the reflection of the rise of an insurgent, anti-EU populist movement and it does not directly threaten the viability of the euro. At the margin, it may reduce the chance that the ECB announces a tapering of its asset purchases at this week’s Governing Council meeting. But spread levels and market volatility are – for now – too well-contained to elicit a specific policy response.”