For a country that boasts one of the highest savings rates in the world, the take-up of private pensions has been disappointing in Italy. There are a number of reasons for this. First, there is a traditional belief in the cradle-to-grave welfare state. Secondly there is the belief of some powerful trades unions that they represent an undermining of the state system, and the lethargy of the government in tackling the problem of incentives. To these could also be added the fact that Italians are, by nature, cautious investors.
However, with demographic studies suggesting that over the past 40 years the worker-pensioner ratio has diminished from 2:1 to less than 1:1, something has to be done, or the state system will collapse. In any event, it is calculated that over the next 20 years the state pension will fall to 30–40% of average wages compared with its current rate, which is almost double that. Only the mutual fund industry has bucked the trend, tripling assets in the years 1997–99.
With the government set to assess the pension problem next year, interested parties are already lobbying hard, with all the usual suspects advocating the usual reforms. These include reducing the state pension, expanding qualification and calculation periods, harmonising the private and public sectors and offering improved tax incentives to savers and employers.
At the moment the relatively generous three-tier pension system operates on a PAYG basis, with annual contributions the highest in Europe. A full range of benefits is offered and these are assessed each year and raised in line with the retail prices index of the previous year. They are financed from general taxation, with the compulsory social security payments being paid through the national institute of social security, INPS. In 1995, reforms linked the state pension to contributions rather than the direct benefit scheme which had been in place. The changeover is not retrospective, however, and has resulted in pensioners receiving benefits based on DC, DB and hybrid calculations. This has resulted in those retiring before 62 years of age being penalised, while those who retire after that cut-off point benefit.
Other organisations represent funds for industrial executives and public office workers. There are also a number of autonomous pension funds representing the professional bodies. Overall employer-employee contributions are 40% of gross earnings split in a 3:1 ratio.
Contributions by both employers and employees is tax-deductible and, in line with other EU countries, benefits are treated as income and taxed accordingly. With the retirement ages for men and women set at 65 and 60 respectively, 20 years’ worth of contributions are necessary, although after 37 years of membership of the scheme early retirement can be taken without penalty. The 1995 reforms also affect this, and propose that early retirement be phased out by 2008.
Public pension funds tend towards the conservative when it comes to investment, as suggested above. Often the whole fund will be invested in domestic assets with a heavy emphasis on bonds and real estate with equities stuck around the 15% mark. Because of the market real estate is less popular at the moment and many funds are selling this asset class, including INPS. However, the Italian equity market is not offering high enough returns for the funds to make a significant shift in investment strategy.
Supporting the state system are a number of supplementary retirement schemes, said to number 870 in total. The recent reforms required all new funds to operate on a DC basis and register with a regulatory body. Currently less than 100 funds with around 1m members are operating under the new rules, although all the older funds are changing their constitutions to qualify.
There are also a number of closed-end pension schemes which have been accepted into the new regulatory system, but many more are seeking approval from the supervisory authority. These closed-end funds usually limit the investment strategies that members can adopt, and managed locally often invest heavily in bonds. The reaction by most employees has been ambivalent, with take-up stuck around the 30% mark. Observers suspect that the funds are unattractive to many younger employees, and argue that they will have to change their investment strategy if they are to compete with other funds coming to the market place. Indemnity payments amount to 7% of salary on average, and employees entitled to participation in such a fund, while not compelled to take part, will usually be prevented from investing in open ended funds.
These latter were introduced at the end of 1998 and the latest figures suggest they have around 100,000 members and assets in the region of L300bn (e154m). These members are drawn from the professional class and the self-employed, with a few others whose workplace does not offer a closed end fund. Although these funds offer a wider range of investment options, members can only invest in one at a time, and give 12 months notice of intention to switch.
Despite the best efforts of the government and the marketing men most Italians still rely on insurance to provide supplementary funding on retirement, making the industry the biggest private pension provider with L235,000bn paid out in 1998.
The only way this situation is going to change is if the government bites the bullet and promotes pension plans. This would allow the small but flourishing smaller plans to grow. The role of the country’s larger companies and state industries is also vital, as well as the participation of multinationals. Although some analysts are confident that the industry can grow, many foreign asset managers who flocked to Italy in the last decade expecting rich pickings have been disappointed. As elsewhere in Europe, although the funds represent private capitalism at its best, the key to the door labelled ‘adequate pension provision’ lies in parliament.
No comments yet