Reform of the supplementary pension system

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In October 2005, the Italian cabinet failed to enact the long-awaited legislative bill implementing law 243/2004 on the reform of Italy’s second pension pillar, the end-of-service allowance. Parliament now has another 30 days to discuss and approve the bill. One of the main points for debate, which caused a split in the parliamentary majority and prevented the approval of the bill, concerns the levelling of all forms of pension funds, thereby cancelling the advantage provided for collectively agreed funds.

Pension legislation in Italy

During the past 50 years, Italian pension legislation has undergone many changes aimed at better protecting workers and consolidating the various public pension regulations in force. Another reason for the changes, especially during the past 10 years, was to reduce the cost of the pension system, the deficits of which were, and continue to be, a burden on public expenditure.

The government headed by Giuliano Amato undertook the first concrete reform action in 1992. Legislative bill 503 of 30 December 1992 was an attempt to align the existing obligatory pension schemes. Law 503 gradually raised the retirement age in all pension schemes from 55 years to 60 for women and from 60 years to 65 for men, except for a few categories of workers. It also raised from 15 years to 20 years the minimum period of social contribution required to be eligible for old-age pensions.

The 1995 reform, named after the then Prime Minister, Lamberto Dini (law 335 of 1995), enacted just two years after law 503/1992 also aimed to curb spending on pensions and balance the state’s pension management finance. The Dini reform law changed the way that retirement benefits are calculated from an earnings-related to contributions-based system - state pensions must be calculated on the basis of contributions actually paid rather than on earnings during the last years of a worker’s career. These corrective measures saved a great deal on state payouts but also significantly lowered pension payments, especially for new generations of workers who are entering the labour market later than previous generations have done.

The change in Italy’s demographic balance, brought about by increasing life expectancy and a decrease in the fertility rate, as well as greater unemployment contributed to the crisis in Italy’s obligatory public pension pillar. Public pensions are paid by the contributions of a diminishing number of active workers, while the number of retired workers continues to increase. Therefore, a parallel, second-pillar pension system was established to supplement the shrinking replacement rate of the obligatory public pension system.

Supplementary pension system

Legislative bill 124 of 21 April 1993 introduced the supplementary pension system to guarantee extra pension benefits in addition to those paid by the obligatory pension system, and to provide adequate tax incentives to invest in this form of saving.

The supplementary system includes the following:

• pension funds;

• individual types of pension (forme individuali pensionistiche, FIP) that can be open pension funds, life insurance or another type of pension-related saving plan.

The type of pension funds can be determined by the body setting them up and the potential beneficiaries. They can be either closed-end funds, collectively agreed funds or open funds.

The social partners can set up collectively agreed or closed-end funds through national collective agreement, local agreement or company agreement. By law, these funds do not directly manage workers’ contributions, which are instead managed by specialist savings management, insurance or financial management companies or banks. The funds can be set up for a single employer or group of employers, for a specific category of workers, industry sector (industry-wide funds) or geographic area (territorial funds).

Banks, savings management companies, insurance companies or financial management companies generally set up open funds and manage them directly, and all citizens can access them. If a national collective agreement allows for workers’ investment into this form of supplementary pension, workers can then have access to these collectively agreed open funds.

The last attempt to reform Italy’s supplementary pension system was on 23 August 2004, when the current centre-right government, headed by Prime Minister Silvio Berlusconi, introduced a reform measure (IT0409101F) and enacted law 243/2004. This law required the government to draft, within one year, a legislative bill concerning the transfer of workers’ accumulated end-of-service allowance (trattamento di fine rapporto, Tfr) into pension funds on a no-objection basis (the so called silenzio-assenso). The Tfr is a lump-sum payment equal to about 7% of the gross annual salary, accrued on an annual basis and adjusted for inflation. The Tfr is usually paid at the end of employment and its original aim was to guarantee workers an adequate income while they waited for their pensions.

Reform provisions

The reform of the supplementary system, Italy’s second pension pillar, as set out by law 243/2004 will affect about 16 million Italian employees and, according to the current Minister of Labour, Roberto Maroni, should net the supplementary pension system about EUR 13 million a year.

The changes resulting from law 243/2004 pertain to:

• The transfer of the end-of-service allowance (Tfr) to the pension funds on a no-objection basis. Employees have six months to decide whether to divert their Tfr to the pension funds - and to which fund - or to keep it with the company. The no-objection provision means that the Tfr of any worker who does not express a preference will automatically be diverted to the pension fund set up by the relevant collective or company agreement.

• Employers’ contributions to the funds. The pension-fund regulation requires both workers and employers to contribute equally to the funds. Therefore, employers must pay an additional contribution to the collectively agreed fund. Workers who transfer Tfrs to another kind of fund lose the right to the employer contribution.

• Access to credit. Because the approval of the reform will deprive companies of access to the workers’ Tfrs, which had been a source of cheap low-interest capital, it also provides for easier credit for companies affected.

• Early withdrawals. After eight years of contributing to the funds, workers can withdraw 75% of the amount paid in, but only to cover health expenses or to buy or refinance their first home (for workers or their children).

• The possibility for workers to switch, without penalty, to another form of supplementary pension, after two years with the fund.

• Taxes, which will be levied on pension savings at a rate of 9% to 15%, depending on how many years’ contributions are made.

Rejection of the bill

In July 2005, the Ministry of Labour presented the draft legislative bill implementing proxy law 243/04. The social partners initially rejected the draft bill and then, after several discussions, proposed amendments to it.

A series of bipartite documents were then submitted to the Minister of Labour by Italy’s main employer organisations (Confindustria, Confcomemercio, Confartigianato and Confapi) and trade union organisations, including the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil), the Italian Confederation of Workers’ Unions (Confederazione Italiana Sindacato Lavoratori, Cisl), the Union of Italian Labour (Unione Italiana del Lavoro, Uil), and the Union of General Labour (Unione Generale del Lavoro, Ugl). In all, 23 organisations formed part of the representation, stating that 'the implementation of the governing principles contained in the proxy law - in line with the current structure of the pension funds - had to respect two main principles: the central role of collective bargaining in the definition of the most adequate supplementary pension forms for each sector of activity and in the determination of the relative funding flows, and the distinction between collectively agreed supplementary pension forms and individual pension forms.'

Starting from this declaration, the social partners have rejected the levelling between collectively agreed funds and individual saving plans, as provided for by the draft bill. They believe that such a levelling would be detrimental to collective bargaining. They also asked for amendments to several provisions relating to the improvement of companies’ compensation (facilitated credit access).

An agreement signed at the beginning of October 2005 between the Italian Banking Association (Associazione Bancaria Italiana, Abi) and the Minister of Welfare, Roberto Maroni, solved the issue of companies’ compensation and credit access. The banking system has guaranteed low interest credit (about 4%), equal to the amounts companies will lose due to the Tfr.

The Minister of Labour presented the amended legislative bill, containing the social partners’ proposals and suggestions to the Cabinet at the beginning of October 2005, but it was rejected on the eve of its approval, scheduled for 6 October 2005. A technicality permitted a 30-day postponement of the deadline for approving the reform.

One of the main reasons for the rejection of the bill is continued opposition by insurance companies represented by the Associazione Nazionale fra le Imprese Assicuratrici (Ania) organisation, which opposes the privileged treatment provided for the collectively agreed pension funds (automatic deferment of the Tfr on a no-objection basis).

The government, despite the public opposition of the Minister of Labour, seems to be willing to allow workers to transfer their Tfrs into individual pension funds, even when there is a collectively agreed fund, and to allow employers’ contributions to these funds too. The trade unions oppose this measure because it opens a favourable market to insurance companies, to the detriment of the collectively agreed funds. According to the trade unions, the pension funds proposed by the insurance companies are less cost-transparent and have lower guaranteed yields than closed-end funds.

Reactions of the partners involved

The Cabinet’s unexpected rejection of the amended legislative bill created concern in the trade unions about the future of the reform. The trade unions fear that the parliamentary centre-right majority could radically change the text, which was amended in collaboration with the Minister of Labour after a series of difficult and extensive negotiations, in favour of insurance companies. The main fear is the introduction of a level platform between the various funds (open, closed-end funds and individual policies), which - the unions believe - favours companies and penalises collective funds.

According to Pier Paolo Baretta, Cisl confederation secretary, 'the parliamentary committees must take on board the advice of the social partners and not only those of the insurance and financial lobbies.' Morena Piccinini, Cgil confederation secretary, added that the government’s decision 'shows a clear desire to introduce different rules in favour of the private insurance system to the detriment of workers and collective bargaining.'

The Minister of Labour, Roberto Maroni, supported by the parliamentary opposition and by the trade union organisations, holds a similar view. According to Mr Maroni, the bill was rejected because of the pressure brought to bear by Ania, based u'on specious reasons, because there are at stake huge and unregulated interests which allow some insurance companies to sell as pension saving funds products which are veritable fakes'. The Minister of Labour reiterated his opposition to aligning all funds, and requested the insurance companies 'not to interfere in the parliamentary work, also because', he emphasised, 'these companies cannot benefit from the no-objection clause because they do not offer enough guarantees.' The Minister seems determined not to change the legislative bill.

The Prime Minister, Silvio Berlusconi, takes a contrary view. Mr Berlusconi did not take part in the vote on enacting the draft bill because of an apparent conflict of interest. Mr. Berlusconi owns a large insurance company, Mediolanum, which has a significant (25%) stake in the life insurance market, providing open pension fund products. The Prime Minister also declared that he 'has no intention of making gifts to the trade unions' by enacting the bill on the Tfr, because they explicitly support the political opposition.

This declaration caused a serious split in the parliamentary majority as Minister Gianni Alemanno, of the An political party, also supported the bill and Mr Maroni’s work on it.

Commentary

The issue of Italy’s second pension pillar, the supplementary pension system, and of its funding through the diversion of workers’ Tfrs is likely to remain open, subject to political controversy during the final phase of legislation. The general election, scheduled for Spring 2006, is a factor in the debate on reforming the system. Relations between the social partners and the government are strained and, often, both the trade union organisations and the employers oppose government decisions.

The government has lost control of public expenditure and must now allocate more resources to reducing the public deficit to meet the European Stability Pact objectives. Its economic policy has favoured real estate and business owners instead of the general economy, and Italy has lost competitiveness, which adversely affects employment, especially in manufacturing. Despite repeated promises, the government does not have the resources to sustain investment in research and development, which are fundamental to restoring the competitiveness of the manufacturing sector.

The decline in the purchasing power of wages and delays in the renewal of several national labour collective agreements also increase the dissatisfaction of both trade unions and employers with government economic policy. This is why the confederated trade unions have called a general strike for 25 November 2005. They want to open negotiations with the government to radically change Italy’s economic policy.

The reform of the supplementary pension system has been overshadowed by this difficult political and economic situation. Many observers say that the government has no interest in meeting trade union requests on the eve of the election. However, the firm opposition to any change in the Minister of Labour’s bill is supported by some majority political parties (such as Alleanza Nazionale). The resignation threats by the Minister and other ministers of his political party (the Lega Nord) would jeopardise government stability and create a crisis that might bring forward the election. All these factors could effectively serve to deter any change in the bill and to avoid the failure of the supplementary pension reform or its postponement. (Domenico Paparella and Marta Santi, Cesos)