The resignation of Italy's centre-left Prodi government and the appointment of Massimo D'Alema to form a communist/centre-left coalition, has put proposed tax legislation, expected to be a major boost to Italy's fledgling occupational and private schemes, on hold.

A draft of the budget law scheduled for implementation in January 1999, which precipitated the fromer government's collapse, included provision for a doubling of the current levels of tax deductible contributions to funds.

This would have seen a dramatic leap in the present contribution ceiling for second and third pillar schemes from L2.5m to L5m.

Piero Marchettini, partner at Adelaide Consulting in Milan, says the reforms were a firm step towards the establishment of an alternative to the country's overburdened social security system. At least the Prodi government realised that the insufficient fiscal treatment of pension funds was a reform priority and were taking steps to improve the terrain for much needed occupational and private pensions," he says.

Mauro Stringat, head of pension fund research at the San Paolo bank in Turin, says the Prodi resignation is merely political posturing along the lines of the Italian political maxim 'Everything must change for everything to remain the same'.

"A similar government will return in some form and the pension law of 1993 will change, but not dramatically enough I believe. The trend is towards increased tax free contributions of up to 5%, but the reality can't be predicted unfortunately."

Stringat adds though that there is widespread acceptance in Italy that the costly social security system will be overhauled in the next two years, and that pension fund reform is urgently needed.

Also tied up in the postponedProdi government proposals was reform of the Italian TFR employee insurance indemnity, which is set to be shifted from the company balance sheet to the pension fund or into company shares, if and when the new finance laws are ratified by parliament."