Valeria Morosini and Laura Mancini believe that pension reforms could boost Italy’s low rate of supplementary pension saving
Private pensions are a relatively new phenomenon in Italy, and although the first law on private pensions was introduced in 1993, this pillar is yet to develop to the extent it has in other European countries. The public pension system has historically reigned supreme in Italy, largely due to the voluntary nature of the private system. However, recent changes to Italy’s first pillar, coupled with the long anticipated reform of private pensions, could signal a change in the pensions landscape.
Italy, like many other European countries, implemented a number of pension reforms last year to address the growing gap in the pensions market. The new measures, which include extending the contribution period, raising the legal retirement age and changing the rules governing the calculation of pensions, are moves aimed at establishing a developed ‘pensions culture’ that has relied too heavily on the single-pillar public pensions system.
On 1 January 2012, the following changes took effect:
• All Italian pensions must be calculated on the basis of contributions rather than earnings. The reform removed the automatic pension-increase mechanism for 2012 and 2013 pensions whose value exceeds €1,402;
• From 2013, the retirement age for women became 62 years and three months for employees and 63 years and nine months for the self-employed. The retirement age will progressively increase until 1 January 2018, when the retirement age reaches 66 years and three months;
• From 1 January 2012, the retirement age for men became 66 and, for 2013, it increased to 66 years and three months;
• Every worker must have made social security contributions for 20 years before they can access their pension, even once they have reached retirement age;
• Retirement age and seniority requirements will from now on be dictated by life expectancy statistics: the retirement age is rising in line with the increase in life expectancy as published by the National Institute of Statistics. However, regardless of life expectancy thresholds, Italy’s legal retirement age in 2021 will be at least 67. According to these new rules, the legal retirement age in Italy is expected to be 69 by 2050, according to the OECD’s Pension Outlook 2012;
• In any case, irrespective of their age, all employees can access their state pension if they have made social security contributions for 42 years and five months for men or 41 years and five months for women;
• Pensions are lower for people who retire before 62;
• Employees can opt to stay at work until they are 70.
Although the public pension reform came into force just over a year ago, further reforms are already in the pipeline. The new government, in office since April, is working on a bill to make the pension system more flexible, particularly regarding to the legal retirement age.
Under the government’s proposals, employees would be given the option to retire between the ages of 62 and 70 years. This flexibility would be balanced through a system of penalties and incentives, encouraging employees to work longer and improve the financial sustainability of the pensions system. This could also help solve the sizeable issue of those employees who left work on the assumption that they would receive their pension in accordance with the old rules, which were overturned by the reform and supplemented with new retirement requirements.
An added challenge facing the Italian public pensions market is the replacement rate; the difference between a worker’s pre-retirement salary and the income they receive from their pension on retirement is expected to increase. Public pension reform and the definitive introduction of a contribution-based system will most likely widen the replacement rate gap between pre- and post-retirement income. It is becoming increasingly apparent that private pensions will play an ever more important role in the security of Italy’s younger generation as they face retirement.
Private pensions are indeed becoming increasingly widespread, despite discouraging signs from the financial markets and employee scepticism. But Italy is still far from reaching its goal of having a developed “pensions culture.”
Following the private sector pension reform enacted in 2007, supplementary schemes were made more attractive to employees by tax saving incentives and the greater flexibility that they offered. The reform also introduced auto-enrolment, whereby, once the employer has explained an employees’s right to a private pension, the employee can choose whether to join the scheme. By not expressing their refusal to join within the first six months of employment, an employee will be automatically enrolled in a private pension scheme in one of three ways (unless, of course, the company agreement provides otherwise).
• First, and most frequently, the employee will be enrolled in the scheme stipulated in the collective agreement applied by the company;
• Second, if there is more than one pension scheme applicable, the employee will automatically be enrolled in the pension fund used by the majority of the company’s employees;
• Last, if the cases mentioned above do not apply, the employee will be automatically enrolled in the supplementary pension fund provided by the Italian Social Security Authority (INPS).
After a good start in the first half of 2007 with the advent of the private pension reform, private pension fund membership slowed. Six years later, the percentage of private and public sector employees who have joined a supplementary pension, far from actually complementing the public pension system, is only around 25%.
It is expected that recent as well as future reforms to the first pillar will encourage more employees to join private pension schemes. In fact, people are today losing faith in the public system, with the widely forecast widening of the pensions gap causing concern among young employees.
Moreover, a private pension scheme could provide a good investment. In 2012, the return on private pension funds was 8-9%; higher than the return on currency adjustment for severance pay (2.9%), which is the main way employees fund private pensions, according to data provided in January 2013 by COVIP.
The recent reform of the first pillar did not extend to the second pillar, although some modification to the current rules would be desirable, particularly in relation to the disparity between public and private pension systems on employee rights regarding company insolvency pension contributions.
In anticipation of the long-awaited reforms to the private pension system, the labour minister has undertaken measures to promote these schemes, including supporting ‘pension education’ for the younger generation and raising awareness of the potential benefits of a multi-pillar pension system.
A multi-pillar pensions system could prove to be more reliable and robust than the favoured single-pillar public pensions system, but it remains to be seen whether the general public will be convinced.
Valeria Morosini is a partner and Laura Mancini is an associate at the Italian law firm Toffoletto De Luca Tamajo e Soci , a member of Ius Laboris global HR law firm alliance