In November 2006, the government approved a legislative bill, partly amending the reform of the end-of-service allowance defined by Law 252/2005. The legislative bill implements an agreement on the different aspects of the reform signed by the government, the employer organisation Confindustria and the three main trade union confederations in October 2006. It complements the broader context of changes and developments of the Italian social security and pension system.
The end-of-service allowance (trattamento di fine rapporto, Tfr) is a proportion of a worker’s wages which, to date, has been set aside by the employer and generally paid to the worker in a lump sum upon termination of employment due to retirement, change of job or dismissal. Each year, the employer sets aside around 7% of the total pay of every employee and, on termination of the employment relationship, ‘returns’ the accumulated sum, which is annually revalued according to a guaranteed yield rate calculated on the basis of criteria established by law. The Tfr accrued in the course of the year is annually increased by 1.5%, to which must be added a supplement equal to 75% of the average inflation rate during the year in question.
In recent years, the Tfr revaluation rate has been on average rather low: in 2005, for instance, the annual net yield of Tfr was 2.5%. Moreover, with time it has become a form of self-financing by companies, given that the costs associated with the cash flow generated by its accumulation are lower than the loan interest rates charged by banks.
The end-of-service allowance also contributes to the so-called ‘second pillar’ of the pension system (see below). In order to encourage participation in supplementary pension schemes and to increase their funding, recent legislation reforming the pensions system – approved in 2004 and 2005; the proxy Law 243/2004 (in Italian) and the implementing legislative bill 252/2005 (in Italian) – provides for the transfer of the Tfr to pension funds according to the principle of ‘tacit consent’ (see below).
Recent developments in social security system
Since the early 1990s, various legislative acts have significantly reformed the Italian pensions system: the ‘Amato reform law’ of 1993; the subsequent Law 335/1995, known as the ‘Dini reform law’; and the more recent proxy Law 243/2004, known as the ‘Maroni reform law’, which introduced further changes to the system to come into effect from 2008 onwards (IT0309203F; IT0303305F; IT0409101F; IT0510105F).
In general, these reforms were intended to rationalise and redefine pension spending so that it is compatible with the changes that have taken place over the past 20 years in the country’s demographic structure, social and economic systems, labour market and state resources. In particular, the Dini reform law, besides changing the age and contribution requirements for pension entitlement, altered the system used to calculate pensions. The system is no longer earnings-related, based on pay in the final years of employment, but is contributions-related, based on the worker’s social security contributions in the course of his or her entire working life.
Together with the reduction of pension entitlements guaranteed by the so-called ‘first pillar’ of the pensions system, the reform laws have also envisaged the development of supplementary social security, a ‘second pillar’ consisting of collectively agreed funds intended to supplement the pensions paid by the public social security institutes. Since 1993, however, the growth of supplementary social security has fallen significantly short of expectations. In its 2005 annual report, the Pension Fund Supervision Commission (Commissione di vigilanza sui fondi pensione, Covip) stated that the entire supplementary pensions sector had only three million contributors, equal to around 13% of the labour force.
As noted above, the 2005 reform provides for the transfer of the Tfr to pension funds according to the tacit consent principle. Thus, from 2008 onwards, workers will have six months to decide whether to transfer their accrued end-of-service allowance to the collectively agreed or ‘closed-end’ funds set up by the social partners, a fund other than that agreed by the social partners, or to keep it within the company. If they make no decision, the money will automatically go into the collectively agreed pension fund by their tacit consent.
Negotiations on the current bill
These most recent legislative provisions, and more generally further reform of the pensions system, have become priorities on the agenda of the current government formed by the centre-left coalition which took office in May 2006 (IT0605039I).
The government’s initial intention to include reform of the pensions system in the budget law, which was being discussed in parliament at the end of 2006, was strongly criticised by the three main Italian trade union confederations – the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil); the Italian Confederation of Workers’ Trade Unions (Confederazione Italiana Sindacati Lavoratori, Cisl); and the Union of Italian Workers (Unione Italiana del Lavoro, Uil). These organisations subsequently signed a memorandum with the government in which they undertook to resume discussion on pension-system reform at the beginning of 2007 and to draw up a proposal for the amendment of Law 243/2004 by March 2007.
The government still proposed to include in the budget law a provision which brings forward by one year the reform of the Tfr envisaged by legislative bill 252/2005. In this case, the main criticisms were made by the largest Italian employer organisation, the General Confederation of Italian Industry (Confederazione Generale dell’Industria Italiana, Confindustria), which considers the provision as excessively burdensome on companies, especially small and medium-sized enterprises (SMEs). The provision affects SMEs in particular by removing a source of self-financing at reduced cost – namely, the Tfr – without providing adequate compensation.
On 23 October 2006, negotiations among the government, Confindustria, Cgil, Cisl and Uil, led to an agreement on the timing and form of transfer of the end-of-service allowance to supplementary pension schemes (IT0610029I). On 13 November 2006, the agreement was incorporated into legislative bill 279/2006 (in Italian).
Main content of 2006 legislative bill
The main points of the legislative bill are the following:
- an automatic transfer of funds. From 1 January 2007 onwards, workers will have six months to decide whether to keep their Tfr in the company or whether to transfer it to a supplementary pension fund. On the basis of the tacit consent clause, 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. After 1 July 2007, the employer must transfer the accrued Tfr to the scheme selected by the worker from the date of his/her subscription to the fund; the provision therefore concerns the flow and not the accumulated stock of end-of-service allowance;
- a specific National Fund to monitor the Tfr. If workers decide to keep their Tfr in the company, an employer with fewer than 50 employees may continue to manage the Tfr as before. If the company is larger, the annual flow of Tfr is transferred to the National Social Security Institute (Istituto Nazionale di Previdenza Sociale, INPS), which will manage it by means of a fund set up in accordance with the rules laid down by the civil code for the management of Tfr by employers. According to the Ministry of Labour and Social Policy (Ministero del Lavoro e delle Politiche Sociali), the Tfr transferred to the fund created at the INPS will amount annually to around €6 billion, most of which will be used to finance the construction and modernisation of infrastructure;
- tax compensation for the transfer of funds. The agreement defines the compensation to be paid both to companies with more than 50 employees, which will be subject to the compulsory transfer of the end-of-service allowance, and to companies which will have to make the transfer to pension funds either because of deliberate decision or the tacit consent of their employees. The compensation will essentially derive from subtracting from the company’s taxable income the proportion of Tfr allocated to supplementary pension schemes, and also the proportion allocated to the INPS fund; it will also derive from a 0.19% reduction in the employer contributions paid to finance unemployment, as well as sickness and maternity allowances. The government has allocated €400 million in order to sustain the financial burden of such compensation in 2007, while the resources for 2008 and 2009 should be determined by the budget law.
Mixed reactions
Approval of the legislative bill on supplementary pensions has been received positively by the government majority, the social partners and the National Association of Insurance Companies (Associazione nazionale delle imprese assicuratrici, Ania), but it has also provoked dissent among these collective actors.
The Minister of Labour and Social Policy, Cesare Damiano, and the Minister of the Economy and Finance, Tommaso Padoa-Schioppa, have emphasised the importance of the provision, ‘which anticipates the expansion of supplementary pension funds and also eliminates an anomalous subsidy for companies, which did not pertain to a market logic’. However, the Minister of Social Solidarity, Paolo Ferrero, did not vote in favour of the provision, calling it ‘perfectly in line with the Maroni reform law, which we of the Communist Refoundation Party (Partito della rifondazione comunista) have always opposed’.
The President of Confindustria, Luca Cordero di Montezemolo, underlined that, with the signing of the agreement and the drafting of the legislative bill, ‘the system has given important proof of unity and has prevented financial problems for small companies’. Moreover, in his view, ‘the launching of supplementary social security is important for the country, and equally important will be the fact that the resources generated by the transfer of the Tfr to the INPS will be used to finance urgently needed infrastructure for economic development’.
Although welcoming the exemption of companies with fewer than 50 employees from the compulsory transfer of the Tfr to the INPS, the General Confederation of Commerce, Tourism and Services and of SMEs (Confederazione generale italiana del commercio, del turismo, dei servizi e delle Pmi, Confcommercio) has not signed the agreement. Instead, the organisation has criticised the method used to reach the agreement for excluding other actors from the negotiations.
Cgil, Cisl and Uil have reacted positively to the earlier introduction by one year of the law reforming the supplementary pension system. Among the trade unions, however, the Italian Federation of Metalworkers (Federazione Impiegati Operai Metallurgici, Fiom), affiliated to Cgil, has criticised the content of the agreement and of the legislative bill, and has therefore dissociated itself from the favourable opinion expressed by the trade union confederation to which it belongs.
Commentary
More than 10 years since the introduction of supplementary pensions in Italy, the legislative bill 279/2006 should finally give decisive impetus to the growth of these pensions. Up to now, the failure to extend and consolidate the second pillar has prevented the complex process of reforming the pensions system from achieving some of its aims. As a consequence, during these years, there was an increasing risk that workers affected by the reforms of the pensions system undertaken in the 1990s might not enjoy adequate pension entitlements in the future.
The measure allowing companies with fewer than 50 employees to manage, at least for the time being, the Tfr as they have done in the past, highlights the gradual nature of transition from public pension schemes based on pay-as-you-go mechanisms to a ‘mixed’ system in which the first pillar is flanked by increasingly important supplementary pension schemes based on a fully-funded system. The measure allowing the state to use part of the annual Tfr flows to finance public works also reflects this gradual approach to change.
The transition involves technical difficulties, but it also requires a major cultural change in that it will affect the habits and expectations of millions of people. Proceeding in stages may therefore be a good way to prevent excessive tensions and to reduce unexpected effects which are difficult to control.
Diego Coletto, Fondazione Regionale Pietro Seveso