Italian pension indemnity could cost up to E1bn

ITALY - The payment of Italian workers’ end-of-career indemnities into pension funds, a key aspect of the pension reform, could cost the government about one billion euros says the president of pension fund regulator Covip.

Professor Luigi Scimia, who took over from Lucio Francario earlier this year, estimated the annual value of the indemnity, known as Tfr, would be in the region of seven to eight billion euros.

In September Hewitt Associates said the total amount of Tfr payments that will be invested in Italian pension funds following this summer’s reform could reach 13.5 billion euros a year.

As things are now, the Tfr – Trattamento di Fine Rapporto - is used by firms as a self-financing source. With the reform, workers who do not explicitly forbid the transferral but do not make a decision about their Tfr, will have the sum paid in closed pension funds, set up by employers and trade unions.

This innovation is known as ‘ silent assent’. Those who make an active choice can pick a closed, open or regional pension funds as well as an insurance policy or can keep their money with their company.

The Italian government is poised to speed up the procedures regarding the Tfr and make this aspect of the reform operative as soon as January.

Scimia, who is also a lecturer at Universita’ degli Studi di Roma, explained the bill for this change would be in the region of one billion euros, breaking in three parts.

As workers could chose not to keep their Tfr in their firms, companies would be in need of bank loans. The government has promised to pay back a rate of about three percent to such companies, an expense of 300 million euros.

The state would also foot the bill for two further adjustments, Scimia suggested. At present in Italy workers can pay up to 12% of their wages, tax free, in pension provisions.

It works to about 5,000 euros a sum which would not be seen as adequate by workers on high incomes. The government might push the tax-free rate up to encourage them, but would lose income.

A further 300 to 400 hundred million euros could be lost with the change of taxation on the investment annual yield already down from 12.5% to 11%, Scimia said.

The total abolition of this tax has been suggested, Scimia said, but he reckons the government could settle for a rate trim of six to eight percent.

As well as boosting the second pillar, the new pension reform, approved in July, are pushing pension age from 57 years of age and 35 of contribution to 60 years.

Neither the welfare nor economy ministries were available for comment.

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