Italy’s plan to divert severance payments to pension funds stirs up concerns

Pension funds and other industry experts have expressed reservations about the plan of the Italian government to divert a share of the severance payment (Trattamento di Fine Rapporto, TFR), raising concerns on multiple fronts – from the impact on pension payouts to the legality of the measure, and the top-down approach used.

Pension funds association Assofondipensione is “cautious” about the plan, secretary Andrea Mariani told IPE.

Channelling severance payments towards pension funds is a sensitive topic because it is part of the remuneration of workers, a territory that is under the domain of social partners having a role in pension schemes, he added.

“We believe it is positive that the debate on how to further improve complementary pensions is being re-launched, but the discussion between the parties is essential to understand first of all what impact it would have on the overall architecture of the [pension] system, because we are introducing a mandatory option, by law, in a system based on voluntary access,” Mariani said.

State secretary for the Ministry of Labour and Social Policy, Claudio Durigon, suggested a mandatory payment of 25% of the severance pay to pension funds to increase future monthly pensions to three times the social allowance paid to low earners, a requirement necessary to leave work at age 64.

Today, newly hired employees in the private sector have six months to decide whether to keep the TFR in companies or transfer it to a pension scheme. The choice to join a supplementary pension plan is irrevocable, while the choice to leave the severance pay in the company can be changed at any time.

Without an explicit choice by the worker, the severance payment is paid to a pension fund, the so-called silent-consent mechanism.

The 25% share of the TFR is a little amount of money, a quarter of the severance pay and less than a quarter of the overall contribution, said Silvio Bencini, partner at European Investment Consulting.

The silent-consent mechanism and a national campaign sponsored by the government in favour of complementary pensions are more appropriate to boost memberships, he added.

Memberships in second-pillar pension schemes stood at only 26.7% of the total labour force last year, counting only people paying contributions. New memberships slowed down to 737,000 in 2023, compared with 826,000 in 2022, according to the latest annual report of pension regulator Covip.

Pension funds’ concerns

Fondo Pensione Cometa, the pension fund for the metal industry, the largest in Italy, is, in principle, in favour of initiatives promoting second-pillar membership, but the ways to reach the goal should be the subject of discussion between the government and social partners, it said in a statement.

Previndai, the pension fund for companies’ managers, backs in principle the proposal to channel a share of the TFR to schemes because it pushes young people to think ahead about additional pensions.

“Whether it will bear fruit or not it will depend mostly on how it is presented, and whether it is accompanied by any information/training campaign on the costs and benefits of supplementary pension schemes,” president Giuseppe Straniero said.

From a practical standpoint, a 20-25% share would generate annuities far too modest to make a meaningful difference, he added.

Assofondipensione’s Mariani also shares the view that the amount would not be sufficient to reach a significant additional pension coverage, while obligations could be misleading for members thinking instead that it would be sufficient.

Legal issues

The government’s plan is also difficult to implement for legal reasons, because “from a labour law point of view it does not seem possible to compulsorily enrol workers in a pension fund”, and because of the likelihood that small and medium-sized companies could encounter difficulties in managing cash flows, said Claudio Pinna, partner and head of wealth Italy at Aon.

According to the union General Confederation of Labour (CGIL), the proposal is at risk of being unconstitutional.

Pinna sees the silent-consent mechanism as the easier option, but advice from a third party should be offered to all those who refuse to channel the TFR to a pension fund, to explain the negative impact of such a decision to workers. The majority of workers tend to keep the TFR in companies.

Moreover, Pinna added that, if pension funds are to receive part of the TFR, they will need to review their member communications, which should clearly explain the impact on pension payouts.

They should also rethink the allocation of severance payments, now channelled towards ‘Garantito’ sub-funds, mostly invested in bonds, that have struggled especially in a period of low interest rates, favouring instead a life cycle option, Pinna said.

Assofondipensione agrees, suggesting reviewing the silent-consent mechanism, and replacing the default option of the ‘Garantito’ options with life cycle strategies, Mariani said.

The association is also in favour of starting a new campaign to inform workers of the benefits of complementary pensions, followed by a new period of choice for all employees, including the applications of the silent consent mechanism.

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