Italy’s generous three-tier pension system is financed for the most part on a pay-as-you-go (PAYG) basis. Annual contributions rates, at 33%, are the highest in Europe.
Social security benefits are financed from general taxation and social security contributions paid through INPS – the national institute of social security.
Employer contributions represent on average 40% of gross earnings, with the employee portion counting for approximately 10% of gross salary.
State pension age, since the beginning of this year, has been raised to 65 for men and 60 for women.
Italian social security contributions are fully tax deductible and benefits are subject to tax as normal employment income.
1995’s ‘Dini Reform’ set up a pensions link to contributions (DC) rather than salary received in an employees final working years (DB).
Supplementary retirement benefits in Italy are provided by a number of sources.
According to Covip, the Italian pensions regulator (Commissione di vigilanza sui fondi pensione), there are currently 870 pension funds in Italy – 774 old ones in operation before the new pensions law and 96 in operation under the new rules, accounting for approximately one million members.
Many older funds have applied for recognition under the new regulations and are changing to DC plans to relieve the burden of establishing insurance annuities to guarantee part of the plan’s liability.
However, the number of regulated closed-end funds is a fraction of the 60 plus funds presently seeking Covip authorisation.
To date, these funds have tended to select Italian asset managers to manage their assets – partly due to low fee levels being offered at RFP.
A significant feature of Italian closed-end funds is their heavy slant to bond investment, with many funds allocated to around the 70% level.
And employee participation in the funds has been damp. Reasons cited include a lack of consideration by young employees and a reluctance to hand over the TFR (trattemento di fine rapporto) indemnity payment to the pension fund – normally a sum equal to 7% of salary accumulated by the company.
Young employees are obliged to invest the whole TFR in a closed-end fund if they join.
Pension fund asset allocation in Italy – one of the most extreme in Europe, means that often 100% of corporate assets are invested domestically with a typical split showing 35% in bonds, 48% in real estate, 16% in equities and 1% in cash.
Open-ended pension plans, sold by banks, asset managers and predominantly by insurers were brought to the market at the end of 1998. These funds can only be subscribed to by the self-employed, professionals or employees in industries where no closed-end funds exist.
Italy already has one of the highest savings rates in the world and private fund growth is expected to mushroom as the government encourages more private saving.
However, the lack of equity in Italy is presently not offering high enough returns to economically replace the state pension.
Estimates are that Italy has less than one working person today for every pensioner, down from two to one in the 1960’s.
Consequently, in 20 years time, at current levels, the state pension will amount to 40-50% of wages against 70-80% today. Foreign managers have flooded into the Italian market chasing the expected glut of business only to be confronted by little real potential so far.
The Italian mutual fund industry has, however, enjoyed significant growth with assets tripling between 1997 and 1999.
Italy’s asset management industry is expected to continue widening its global investment perspective.
While the Italian government is slated to review the state pension system next year, few people expect significant change - partly due to the powerful presence of the country’s unions. Proposals have been put forward though by interested parties to reduce the state pension levels. Hugh Wheelan