Auto-enrolment in Italy: An unlikely champion
Italy tried automatic enrolment in 2007 and it failed. Workers were given six months to decide whether their severance pay money, or Trattamento di Fine Rapporto (TFR), should be kept on their company’s books or transferred to a second-pillar pension fund. After an initial boost in membership – the state even transferred the pots of workers who expressed no preference – pension funds were left reeling, desperately trying to convince workers to join.
As of the end of last year, only 6.5m workers, about 25.6% of the workforce, were covered by a second-pillar pension. This is too small a number, given the planned future decline of public pension benefits.
A 2011 paper by the Organisation for Economic Co-operation and Development (OECD) argued that using the TFR to lure workers proved to be the deciding factor. Employers had no incentive to part with that money, so they did as little as they could to ease the process. The government ran an ineffective information campaign, and Italian workers decided to keep the TFR, which many saw as a resource for difficult times.
But this year, Prevedi, the Italian fund for employees in the construction sector, began its own version of automatic enrolment, with a framework that might prove to be a huge success. The fund has worked with its founding trade unions to implement a collective agreement that foresees “contractual contribution”. This means, according to the collective labour contract, that employers are required to contribute part of an employee’s salary to Prevedi. Employees who are not yet members of Prevedi automatically become members of the fund.
As a result, this year the fund has become the largest in Italy in terms of membership, with more than half a million members.
Prevedi is probably the least likely candidate for a programme of this kind, explains its director Diego Ballarin. “In the construction sector,” he says, “workers reclaim their TFR very often and use it as a substitute for salary during the frequent periods of unemployment. Furthermore, the sector is incredibly fragmented, with construction companies employing as few as three workers. This makes it extremely difficult to reach out to employees.”
So how did Prevedi do it? First, it obtained special permission from the country’s regulator, COVIP, to scrap the obligation for workers to transfer their TFR when they join the pension fund. This way, construction workers can still rely on this important form of income. Then, says Ballarin, the fund studied the existing regulation, looking for innovative ways to increase membership.
It found that, although the rules state that joining a pension fund is “voluntary”, this element of membership could be realised either on an individual or a collective basis. In this sense, the contribution of the trade unions was fundamental. “They stuck to the plan,” Ballarin adds, “even though the sector has been hit very hard by the crisis.”
Prevedi’s director says that, from the employers’ point of view, this is also beneficial. Because they contribute to the scheme, their mandatory contribution to the public pension fund, INPS, is reduced, representing a net gain for employers in terms of labour costs.
For Prevedi, which has AUM of more than €500m, the challenge is to turn its new “contractual” members into fully-fledged ones, who also contribute a significant part of their annual salary.
Ballarin explains that the fund will analyse the needs of the new members and plan the strategic asset allocation accordingly. This may include alternative assets, he adds.
The question now is whether other sectors could follow this example, giving a much-needed boost to membership figures. Ballarin says the model is being considered by other pension funds, although no formal announcements have been made to date.
If the recent regulatory measures proposed or approved by lawmakers are anything to go by, second-pillar pensions are not on the agenda of prime minister Matteo Renzi’s government.
The government recently passed a measure whereby all workers can access their TFR before the end of their employment period. Thankfully, few workers took the opportunity.