ITALY - Assets flowing into the newly-created INPS social security institute fund might not bring the expected relief to Italy's tight budget deficit situation, the European Commission has warned.

The Italian government is hoping part of the severance pay TFR will yield a net gain of more than 0.3% this year, decreasing over the next few years, as more benefits are paid out.

But citing the unpredictability of workers' choices, the European Commission noted in its 2007 public finances report on the euro-zone "there are considerable uncertainties attached to the estimated impact of this measure on the budget".

Under the new TFR provision, workers in companies with more than 50 employees have until June 30 to decide whether they accept the "silent consent" provision which will see their severance pay money go into a second pillar pension fund.

Their other option is to send a letter to their employer stating the money should remain with the company and in the latter case the assets are then held in the INPS state fund.

Government projections estimate 60% of employees concerned will actively choose not to see their money go into a pension fund. Because of the "silent consent'" provision, the EU commission sees this prediction and its influence on the budget as being "at risk".

Recent surveys suggest nearly 40% of the Italian workforce have already decided not to put the money into a pension fund but with around half of employees still to make their choice over the next two weeks, it is unclear whether the percentage estimated by the government will be achieved.

The European Commission predicts the INPS gain will lead to additional spending in the future. It therefore stated in the report "it must be noted while reducing the deficit, this measure does not improve fiscal sustainability."

Italy is among the seven EU member states which are still subject to an excessive deficit procedure.

However, the commission also noted "thanks to the pension reforms adopted" the long-term budgetary impact of ageing in Italy is lower than the EU average.

But it added this is only the case if the reforms are fully implemented, especially in relation to proposals for "planned periodical actuarial adjustment in line with life expectancy".

The EU commission has also urged Italy to increase the employment rate among older workers.