Italy: Crisis puts reforms on hold
A further campaign to increase membership of private pension schemes is not expected until economic prospects improve, reports Nina Röhrbein
Italy's most important recent change in pension legislation took place in 2007. That year it was agreed that an employee's annual severance pay, the trattamento di fine rapporto (TFR) - which is paid out to employees at the end of their employment - would automatically be moved to a pension fund unless the employee opted out.
In its annual report published in June, Italy's pensions supervisor Covip made a comprehensive assessment of the situation so far and hinted at some possible developments in the future, according to Ambrogio Rinaldi, central director at Covip and chair of the OECD working party on private pensions.
Rinaldi says the movement of the TFR into pension funds has met with a mixed review: "There has been a good increase in the membership. We have had an increase of over 50% from 3.2m pension fund members before the reform to 4.9m now. But while this increase is good news, the coverage rate of all potential members is unsatisfactory at 26%."
Rinaldi says that, based on this assessment, Covip has called for another private pensions campaign in the future.
"But there is still no clear consensus on the timeframe. With the financial crisis still ongoing and a lack of confidence in the economy it might not be the right time to tell people to save more because their pensions will be worse in the future," he says. "In other words, while pensions have not been forgotten, the timing of the crisis somehow prevents the government to take big decisions on them."
But the government is working on one piece of pensions reform relating to the first pillar, after the European Commission asked Italy to comply with its anti-discrimination rule so far as retirement ages for men and women are concerned. Until now, women in the public sector have been able to retire with full state pension entitlements at 60, while men had to work until their 65th birthday. The government is set to align these dates and new rules are expected very soon.
It will also introduce an indexation of the retirement age in line with rising life expectancy from 2015. The government hopes that by then the economy will be in better shape, helping to convince people that a later retirement is needed.
With regards to pension funds regulation, talk of a reform of decree 703/96 to relax the investment limits for pension funds has been around for a few years.
Closed and open pension funds are currently restricted when it comes to investing in alternatives and are not allowed to take up short positions, whereas pre-esistenti pension funds - the ones that were established before the 1993 reform - can invest in alternatives including hedge funds, private equity and real estate.
However, in the wake of the financial crisis, the reform has been put on hold.
"The government does not want to introduce new rules in this current market environment, which would allow investors to start using different instruments it cannot monitor and control," says Carlo Cavazzoni, global head of distribution at Generali Investments. "But the reform could be introduced as early as next year."
Rinaldi thinks it is possible that work on the reform of the decree may begin again this autumn, depending on the administration responsible, the Ministry of Economy.
"Nevertheless, there is a feeling that the decree was one of the elements that made the impact of the financial crisis on Italian pension funds less severe than on the pension funds of other countries," he says. "And this - combined with the fact that investors currently use relatively good judgment on the rules of the decree - has made any changes to the decree less urgent. But of course there are a few things that have to be updated and this will be done as soon as possible.
"For example, there is a ceiling of 20% on the amount of liquidity pension funds can hold based on the idea that they should invest with a long-term horizon and not according to liquidity. But in the middle of a crisis and with investment lines targeted at people close to retirement, it may be a good idea to hold more than 20% in liquidity. That is why we already allowed pension funds to relax this limit in the wake of the crisis. It is now expected that the liquidity ceiling will be dropped entirely in the new version of the decree."