Italy is on the brink of dramatic changes to its pension fund market. Either the Maroni reform goes on and pension funds grow strongly, or the industry will face a new paralysis that will be detrimental to future retirees. A third way, which is going back to a very generous social security, is not consistent with the EU budget constraints.
Mauro Marè, chairman of Mefop (Società per lo sviluppo del mercato dei fondi pensione), tries to ring alarm bells from the body, which was created seven years ago by the Italian Treasury department in order to promote and develop the pension funds’ market.
Mefop is still 60% controlled by the Treasury, but its ownership has widened and currently 70 pension funds are shareholders. “We have a broad mission to help funds deal with legal problems, keep update with new laws ,” says Marè. “We organise workshops, do research, publish newsletters and reports. All this costs our members a flat annual fee. We can also provide advice ‘on demand’ for an additional charge”.
So Mefop’s mission is essentially institutional, but also in a minor way market oriented. “I hope that soon our identity will be clarified and we’ll become either totally state-financed or totally market oriented, although some mixed solutions are possible”. Since the beginning, when it received its capital from the Treasury, Mefop has not been funded with public money. The agency, which has eight people on its staff, will in three or four years need more resources, if it has to carry on its role in the market.
“Right now our most important job is to make Italians understand that the replacement rate, or the portion of their last pay that will be covered by social security, is going to drop dramatically from the old 70-80% to the new 30-40% established by the Dini reform,” Marè points out, adding: “Without strong pension funds, Italians will retire with a very poor income”.
This is why the Maroni reform must go on according to Mefop’s chairman: with the new rules, on the Trattamento di fine rapporto (TFR).
“At last after 10 years we have a law that reorganises the whole system and allows pension funds to grow,” says Marè. “So far all Italian pension funds have accumulated very small assets, €40bn is a meagre 3% of our GDP. Using the TFR is the only way to build enough resources to give workers decent complementary benefits. My main concern is that political parties, trade unions, pension fund associations may be tempted to re-open the discussion and the reform will be frozen indefinitely. That would be a catastrophe.”
The new rules were originally supposed to come into force this year, but the Maroni administration postponed the deadline to 2008, officially because nobody was ready, among employers and employees or money managers and insurance companies. Some critics suggest that at issue was the Italian budget, because employers were promised a tax discount to compensate them for losing the TFR (which works as a zero-cost loan). Now it is the Prodi administration that has to deal with this hot issue and find ways to balance the budget.
Moreover, the Maroni reform dissatisfied many constituencies, among these are the insurance companies and their authority Isvap, because the reforms united all powers of oversight into one single authority, Covip. Previously, pension funds used to be controlled by many agencies, depending on their sponsors. Enforcing the new scenario could be another challenge for Prodi.
“I believe that one supervisor is better than many,” says Marè. “It is true that the Maroni reform has been heavily criticised by different players, from Confindustria (the employers’ association) to trade unions, including the very same existing pension funds.
“I do agree that some parts have to be changed. But all things considered, it is a good law, a big, positive step forward. We cannot open the Pandora’s box and start discussing everything over and over again. If we do this, and especially if we question the two basic ideas of the TFR’s automatic transfer to pension funds and the uniformity of all pension schemes, we risk paralysis for a very long time.”
Under the new rules, a worker can choose where to contribute his retirement savings, while until now if he was employed in an industry or a company with a pension fund established by trade unions’ negotiation (a so-called closed fund), his contributions could go only into that plan.
The ‘equivalence rule’ means that a worker can opt for the alternative of individual pension funds.
Trade unions do not like this ‘equivalence’ because they fear their funds will be at a disadvantage because of the huge marketing resources of insurance companies and investment firms.
“The new law can be amended with secondary rules that impose different governance for different products,” says Marè. “For example Covip can ask for more disclosure from FIPs and stricter rules against conflict of interest for FIPs’ managers. It is not necessary to rewrite the whole law.”
It is not clear yet what the Prodi administration wants to do with the Maroni reforms. The labour secretary Cesare Damiano used to be a leftist trade union leader and may be inclined to listen to his former colleagues looking to re-open the discussion. On the contrary, the Italian central bank’s governor Mario Draghi and the economy and finance secretary Tommaso Padoa-Schioppa are pushing for preparing for the 2008 deadline. “I think Draghi’s position is correct,” says Marè.
“At the Bank of Italy’s annual meeting he explained that without strong pension funds Italy is condemned to an unsustainable pensions future. Thanks to the new system introduced by Amato (1992) and the Dini reform in 1995, social security expenditure has declined from 20% to less than 15% of GDP and it will remain pretty stable in the coming decades. So from this point of view, Italy is better off than France or Germany. “Since 1992, we have made three crucial pensions reforms. On the other hand future retirees have not yet realised that social security benefits have been seriously cut,” he says.
With the old system, benefits were based on wages and the first retirement check was around 80% of final pay for someone who had worked for 40 years. With the new system, benefits are based on contributions and will cover less than 50% of the last wage for a private sector employee, even worse for a self-employed person who will get only 30% of his previous income.
“The new system is sustainable only if pension funds provide sufficient extra-benefits, which cannot happen with their current scarce contributions and assets,” says Marè.
“In 2015 the first Italian baby-boomers will start to retire and receive the new pensions: they will find themselves destitute if the pension fund reform do not become a reality.

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