New tax rules aim to foster supplementary pensions

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In December 1999, the Italian government issued a legislative decree aimed at promoting supplementary social security schemes. The decree permits a 12% tax deduction for contributions to such schemes and sets at 11% the taxation of earnings from occupational pension funds. The decree also provides for the possibility of using the end-of-service allowance (Tfr) to contribute to occupational pension funds.

On 29 December 1999, the government, after long talks with the social partners, issued a legislative decree that makes major changes to the regulations governing supplementary social security schemes (IT9909346F).

In Italy, supplementary pension funds – both the so-called "open funds" created by private business and insurance providers, and the funds collectively agreed by the social partners – and private pensions insurance are experiencing difficulties in expanding. The reasons lie in the relatively good performance of the public pensions system and in the existence 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, thus guaranteeing workers a degree of economic security after retirement.

The problems of the public system caused by demographic trends (longer life-expectancy, reduction of employed workers' contributions, etc) has made necessary, in addition to the existing compulsory social security system, the creation of the so-called "second pillar" - other forms of supplementary and occupational security. Besides the "open funds", occupational pension funds have been introduced through the conclusion of collective agreements (IT9806228F). However, these new forms of social security have not had great success among workers.

Italians' net wages are lower than the European average due to high tax and social security contributions. This situation hinders the possibility of workers allocating part of their monthly wage to a supplementary social security fund. This is why there is a perceived need to encourage workers' participation in supplementary pension schemes, by reducing taxes on the funds' earnings and differentiating them from all other forms of economic investment, and permitting a different use of the Tfr.

In this context, the decree approved on 29 December 1999, provides that:

• the tax levy on the annual earnings of insurance funds will be set at 11% (for other forms of investment, earnings are taxed at 12.5%);

• there will be a 12% tax deduction (currently 6%) for contributions paid to supplementary pension funds, up to an annual maximum of ITL 10 million;

• workers, in order to benefit from these incentives, will have to allocate parts of their Tfr to a supplementary pension fund. Since the allocation of the Tfr to these funds can take place only through an agreement with a trade union, this rule favours the collectively-agreed funds, making them more competitive than the others on the market; and

• workers' relatives will be allowed to take part in pension funds and will also benefit from the 12% tax-deduction on contributions.

The trade unions are satisfied with the new provisions and, in a press release, they highlighted "the reversal of the government's position as regards the tax neutrality of savings" and "the reaffirmation of the guarantee of freedom of choice for workers, obtained through the elimination from the text of the decree of tax penalities on the collectively agreed funds".

Enrico Micheli, under-secretary at the Prime Minister's office, commented with satisfaction that "the decree will spur positively the allocation of the Tfr to pension funds".

Confindustria, by contrast, is less satisfied with the decree. It supports equality of treatment between the market funds and the collectively-agreed funds. In particular, Confindustria does not accept the transfer of the Tfr - at present managed by companies - to other financing bodies. The managing director of Confindustria, Innocenzo Cipolletta, described the situation of the supplementary funds as a "mess" and believes that both the decree and the law which originally established the funds (law 124 of 1993) have limitations that will make their application very difficult. "In Italy the worker is not free to subscribe to an insurance fund or to decide how much to allocate to it (…) until an agreement is signed, the worker cannot do anything", he said. According to Confindustria, it will be possible to address the problem of the use of the Tfr to finance suppplementary social security only within the framework of new and immediate negotiations aimed at reforming the public social security system. This proposal has already created disagreements with the trade unions and the government (IT9912137F)