Supplementary pension funds under debate

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Supplementary pension funds, on top of the mandatory state pension system, were introduced in Italy in 1993. By the end of 2000, however, membership of supplementary funds remained at a very low level. In 2001, the social partners and government are seeking to promote supplementary pensions through an advertising campaign and tax incentives, while negotiations are due over additional funding for the schemes.

The Italian pensions system is currently regulated by two items of legislation: legislative decree no. 124/1993 and law 335/1995. The first laid the basis for, and regulates the operation of, the supplementary pensions (previdenza complementare) system and the second reformed the obligatory state pensions (previdenza obbligatoria) system on the basis of an agreement between trade unions and the government, which was not signed by the Confindustria employers' confederation or any other employers' organisation.

Before the 1995 reform, pension entitlements under the obligatory state pension system were earnings-related: the pension of each worker was calculated on the basis of their average pay over the last 10 years of employment, plus a 2% supplement for each year of service. The 1995 reform retained this system for workers with many years of contributions but introduced a new, individual contributions-based, system for calculating pensions for all the workers entering employment after 1 January 1996 and for those workers who, by that date, did not have at least 18 years of contributions. This new way of calculating pension benefits is based on the total contributions made by each individual worker, in relation to their age and life expectancy at the time of retirement.

The present pension system introduced in 1995 guarantees, for an equal number of years of contributions, a pension 35% lower than that foreseen by the old system. In order to receive an adequate pension, all workers covered by the reformed obligatory system will have to resort to the voluntary supplementary pensions system.

Supplementary pension funds

On the basis of decree no. 124/1993, supplementary pension funds are divided into two categories: "closed" collectively agreed funds and "open" funds.

Closed collectively agreed funds

"Closed" supplementary pension funds are promoted by the social partners (trade unions and sectoral employers' associations) - and thus by non-profit organisations. They are established by collective agreements (IT9705205F) and available only to those workers who are members of the union which signed the collective agreement establishing the fund. The collectively agreed funds are managed by the members' assembly, the board of directors, the president and vice-president (who are the found's legal representatives) and the board of auditors.

The board of directors (consiglio d'amministrazione) is the political management body of the fund and it is composed of representatives of the relevant employers' and trade union organisations, elected by the participants in the fund in a secret ballot. The board of directors must define the criteria for allocating the fund's investments and for verifying the results of these investment. To this end, the board of directors entrusts financial managers, chosen by public competitive tender, with the assets of the fund. The results achieved by the financial managers are verified and assessed by external experts chosen by the board of directors.

The funds' financial sources are made up of the contributions of the workers participating in the fund and the contributions paid by their employers (the level of contributions for both is defined by the relevant national sectoral collective agreement), plus a portion of the end-of-service allowance (trattamento di fine rapporto– Tfr). The Tfr is a distinctive feature of the Italian social security system. It involves setting aside a portion of a worker's pay, which is then paid as a lump sum at the end of the employment relationship (IT9906119N). For all the workers enrolled in a supplementary pensions fund who were hired after 28 April 1993, the entire Tfr is allocated to the pension fund. For workers hired before that date, the portion of the Tfr to be allocated to the fund must be defined by the national sectoral collective agreement.

Workers who decide to join a supplementary pensions fund will be able to see their assets appreciate and at the same time have their investments guaranteed by the law. If the fund's financial managers fail, creditors will not be able to remove workers' contributions allocated to the fund.

Open funds

"Open" supplementary pension funds are promoted by institutions which operate on the financial market - banks, financial intermediation companies, insurance companies and savings management companies. Everyone, regardless of their type of employment relationship, can join these funds. The benefits are calculated according to the individual capitalisation method. These funds, unlike the closed funds, provide well-defined benefits: a life income annuity is pre-established and is related to the amount of contributions paid by the worker involved.

Public supervision

Every financial body operating in the field of supplementary pensions is subjected to public oversight and inspection. Pension funds, in general, are under the supervision of the Pension Fund Supervision Commission (Commissione vigilanza sui fondi pensione, Covip), while the Italian national bank, Banca d'Italia supervises the banks involved. For the funds' financial managers, the inspection bodies are the National Stock Exchange Commission (Commissione Nazionale per le Società e la Borsa, Consob), a body which controls all companies listed on the stock exchange, and the Private Insurance Supervision Commission (Istituto di vigilanza delle assicurazioni private, Isvap).

The accounts of the supplementary pension funds must be balanced at the end of each year, and before 30 April each year the fund must inform all members of their individual financial statement.

Participation in the funds

According to the statistical update on pension funds drawn up every year by Covip and published in its annual report, there were 142 pension funds in Italy on 31 December 2000. Of these, 99 were open funds and 43 were closed collectively agreed funds.

The potential membership of the collectively agreed funds is about 14 million workers. Among the 16 funds which are already fully operational - ie those which have reached the minimum number of members necessary and which have been authorised to become operational by Covip - the average membership rate among potential members is 30.5% (IT9806228F). The funds that are awaiting authorisation and which have reached the minimum number of members have a membership rate a little below 50%, while the funds so far authorised only to seek members have an enrolment rate of only 1.5%.

Among the 16 collectively agreed funds which are already fully operational, membership rates vary widely. Only three have an enrolment rate of at least 70% of the workforce, five are between 33% and 60.5% and the rest are below 30%.

In September 2000, the number of members of the 93 open funds, at more than 188,000, had increased by 17% compared with June 1999 but was still significantly below the number of members of the collectively agreed funds (more than 850,0000).

On the whole, participation in the funds, even if it is still growing, remains below the expected levels. This is why both social partners and the government intend to increase participation through an advertising campaign aimed at making people more aware of the supplementary pension system, and through a policy of tax incentives.

Tax incentives

Together with the social partners, the government has recently agreed upon a particularly encouraging tax regime for supplementary pension funds (IT0001141N). Legislative decree no. 47 of 18 February 2000 levied a tax of 11% on the returns on the pension funds' financial investments. This rate is lower than the 12.5% tax applied to all other financial yields.

Moreover, workers are able to deduct 12% of the contributions paid to supplementary pension funds from their total taxable income, up to an annual maximum of ITL 10 million (EUR 5,165). For the workers who contribute a portion of their Tfr allowance to a fund, the maximum tax deduction is twice the portion of the Tfr allocated to the fund.

Companies will be able to benefit from tax incentives in order to recover the loss of financial liquidity caused by allocating portions of their workers' Tfr allowances to the pension funds (companies normally hold on the sums represented by the Tfr until the worker concerned leaves their employment). Companies will be able to benefit from a 3% tax credit for the portion of their employees' Tfr allocated to a pension fund.

Social partner views

At present, the main concern of the social partners relating to supplementary pension funds is that the number of young people joining the funds is very low. The highest membership rates are recorded in highly unionised sectors characterised by the presence of large companies - such as the metalworking and chemicals industries.

Beniamino Lapadula, the head of social security policies at the Cgil trade union confederation, referring to the difficulties that the pension funds face in finding members, says that: "outside big industries, recruitment is very difficult. Where unions are weak and employers fragmented, there is nothing we can do about it." Paolo Onofri, an economist who has inspired much of the government's social security and pension policy, takes a positive view of the membership results recently reported by Covip, but commented: "we have not managed to encourage membership in the sectors which have the greatest increase in employment - the services sector, for example - because there are few trade unions representing the increasing number of workers in this sector." Alessandro Vecchietti, the head of social security at the Confcommercio commerce employers' organisation, is quite optimistic about the future and said that the current phase is one of development. Mr Vecchietti also complained that the social partners have not promoted the membership campaign in an "incisive" way, claiming that a more active approach is required because fund membership is not automatic.

Trade unions and employers' organisations intend tackling together two important issues, which are connected in some ways: the lack of fund members and an increase in funding for supplementary pensions. The social partners aim to solve the first problem, together with the government, by running a massive information campaign. In order to solve the second problem, the social partners intend starting negotiations on the use of the Tfr for financing supplementary pensions. Negotiations will be conducted along with the new government that parliament will appoint after the general elections scheduled for 13 May 2001.

The social partners are still divided on some supplementary pensions issues. The division had previously concerned the trade unions, which did not agreed on the means whereby workers should join supplementary pension funds. At first, Cgil wanted workers explicitly to express their willingness to join a fund, but subsequently agreed with the Cisl and Uil confederations to use the "silence=approval" procedure. This means that workers would have to state, within a fixed period of time, that they do not want to join the fund - otherwise they would automatically become members.

The current divisions among the social partners are more complicated, and concern the use of the Tfr allowance. One dispute relates to how the allocation of the Tfr to pension funds should be regulated. Cisl and Confindustria believe that the issue should be regulated by collective bargaining, while Cgil believes that the matter should be regulated by law and has repeatedly pressed the government to issue a decree-law on the subject, despite the explicit disagreement of Cisl.

Trade unions and employers' organisations are also divided on the issue of tax breaks for employers. Confidustria believes that the Tfr, which amounts to about 8% of a worker's pay per year, represents an important portion of self-financing at a relatively low cost for companies. For this reason, Confindustria believes that companies are entitled to tax compensation to reduce the impact of the loss of financial resources linked to the transfer of Tfr into the pension funds.

Confindustria also insists that the Tfr issue must be tackled in a more general context, both when the effects of the 1995 pension reform are due to be assessed during 2001 and, in any case, within the context of global negotiations on employment issues, labour flexibility and the fight against illegal work (IT0102277F). The Cisl and Uil trade union confederations state that they are willing to start global negotiations with employers and the government on all the items on the agenda. Cgil, on the contrary, refuses such global negotiations.

Commentary

There is one aspect which unites the social partners and the government with regard to the situation of the pensions system: the need for the "second social security pillar" - ie supplementary social security - to become, as soon as possible, sufficiently strong to further lighten the burden on the state pensions system. The development of supplementary pension schemes is, therefore, a precondition for the reform of the pension system foreseen for 2001. However, the political situation does not seem particularly favourable to a development of this kind: the divisions among the trade union confederations, the disputes between Cgil and Confindustria on all items on the agenda, and the current electoral climate do not encourage an agreement among the partners.

The outcome of the May general elections will influence the development of the situation. If the centre-right coalition - currently in opposition - wins, this will probably start a long phase of political polarisation, which could lead to a radicalisation of the industrial relations climate. If the ruling centre-left coalition wins the election, it is unlikely to act quickly on either obligatory or supplementary social security.

It is very likely that the social security issue could become a matter of political and social conflict, as was the case in 1994. This could lead to the postponement of any kind of social security reform, despite the constraints on public expenditure fixed by the EU Economic and Monetary Union (EMU) stability pact, and the repeated requests for change made by the European Commission and the main international institutions, such as the Organisation for Economic Cooperation and Development and the International Monetary Fund. (Domenico Paparella, Cesos)