End-of-service allowance may contribute to development of supplementary pensions
In June 1999, the Italian government approved a legislative decree which allows for the Tfr end-of-service allowance, to which employees are entitled when they leave their jobs, to be converted into bonds or shares.
A legislative decree approved by the government on 16 June 1999 changes radically the end-of-service allowance (trattamento di fine rapporto, Tfr) system. Tfr is a form of deferred pay established many decades ago to support retired workers' income while they are waiting to receive their pensions. Under the scheme, employers put aside approximately one month's pay per worker per year, with the sum usually paid to the worker at the end of the employment contract. The new decree's main objectives are to help finance supplementary pension funds (IT9806228F) and to contribute to companies' funding .
The Tfr may now be converted into bonds or shares where both the employee and employer so wish. The government has provided for tax incentives for companies which accept to unfreeze accumulated Tfr for this purpose. The mechanism is rather complicated and the details of the operation vary according to the type of company in question.
Most companies will be able to use the money collected every year for the Tfr to buy shares to be allocated to a pension fund. Thus, in the case of a listed company, the board of directors will be able to decide whether or not to increase the company's share capital by issuing new shares, which could then be made available to pension funds. The funds, following a decision of their administrative body, will be able to buy such shares using the Tfr of workers who agree to the scheme. The pension funds will also be able to use the money received to buy bonds and other company shares regularly listed on the Italian or foreign markets.
Non-listed companies will be able to issue bonds (which can be converted into shares if the company is listed in two years) to be made available to pension funds for purchase using the Tfr.
Another way of transforming the Tfr into bonds includes the possibility for the pension funds to buy bonds from "qualified businesses" such as banks, insurance companies and common investment funds operating within the European Union.
Both the management bodies of the companies involved and the workers concerned will have to submit a written consent in order to benefit from this new financial instrument. The Ministry of the Treasury will accord tax reductions to companies which follow the measures provided for by the legislative decree.
Giuliano Amato, Minister of Treasury, declared that this is "the first step to strengthen the pension funds system, a tool needed by the country". Innocenzo Cipolletta, general director of the Confindustria employers' organisation, underlined the voluntary character of the initiative: "we all agree on a system which can be applied on a voluntary basis for both workers and companies." Finally, Betty Leone, the official responsible for social security at the Cgil trade union confederation, said that the decree "is a way to promote pension funds and to spur companies to become listed" but she is concerned that this path could also lead to employee shareholding, a leading idea of the Cisl confederation which is strongly rejected by Cgil (IT9905113N).