ITALY - Unions and the government have returned to the negotiating table to talk about increasing the retirement age and cutting pensions.

Prime Minister Romano Prodi has already proposed an increase of the statutory retirement age from 57 to 60 years might happen gradually from 2008 rather than at once.

The strong Italian unions had heavily criticised the sudden three-year increase of the retirement age but have said they were prepared to talk discuss this new suggestion.

However, they oppose any negotiations about a change in the first pillar pension payments. The government has said it would like to review the system to cut pensions and make the system more affordable.

Italy is currently spending 14% of its GDP on first pillar pension provision, compared to an EU-15 average of just over 12%, but it has been suggested a review of future pension payments could see them cut by as much as 6-8%.

In 1995, Italy formally introduced contributory additional pension provision as a substitute to lower pension payments in the future.

However, the second pillar has so far seen slow growth. This is because Italy's economy is mainly made up of small and medium-sized businesses which often cannot afford to set up pension provisions for their few workers.

The country's pension industry should see an enormous growth later this year as around €5bn in severance pay, so-called TFR, money is expected to flow into pension funds.