Italy: Revolution, not evolution
Italy seems to change its pension system as often as it changes prime ministers. The only constant is the stalemate surrounding supplementary pension funds, which have never really taken off. This is the picture that emerges from the latest annual report of regulator COVIP, published in May.
Today, only one in four workers participates in any form of pension plan, and that comes seven years after the implementation of new rules about TFR (trattamento di fine rapporto) – the money that employers reserve and grant as a lump sum to their employees when they leave. The reform was intended to nudge employees to transfer their TFR to a pension fund.
At the same time, pensions paid by the public system are shrinking as a result of labour minister Elsa Fornera’s reform that became effective at the beginning of 2013 under the government of Mario Monti.
The current prime minister is Matteo Renzi, who took office in February and whose Democratic Party (PD) won more than 40% of votes in the latest European elections. Strengthened by that victory, Renzi now wants to fulfil his promise to ‘revolutionise’ the Italian system, starting with the public administration. In fact, he has asked people to send suggestions to firstname.lastname@example.org – literally meaning email@example.com.
Among the changes already announced intended to cut bureaucracy and waste is abolishing COVIP as an independent authority and incorporating it into Banca d’Italia, the central bank. This idea faces opposition from many politicians, including Susanna Camusso, the leader of the left wing trade union CGIL – which officially supports the government but disagrees with many of Renzi’s policies.
The fate of COVIP will be decided together with other financial measures that may include increasing taxes on pension funds’ investment income from 11% to 11.5%, which is intended to help finance the compulsory retirement systems of independent professionals such as lawyers and accountants. These systems only recently came under the supervision of COVIP. They were previously free to operate as self-regulated entities, which is one of the reasons why some of them invested heavily in bad financial derivatives, jeopardising the funding status of those retirement systems.
The financial health of most pension funds is adequate only because their investments are very conservative – around half their investments are in Italian government bonds and only 25% is in equities. Their problems remain, however – political influence over investments, the slow pace of growth and a decline in contributions.
First, politics. COVIP’s new chairman is Rino Tarelli, a former leader of the moderate Catholic trade union CISL, and the new minister of labour and social policies is Giuliano Poletti, the former chairman of Legacoop, the left wing national association of co-operatives. Commenting on fund asset allocation, both recently said their investments in Italian equities – currently representing 1.7% of their portfolios – are too low.
“Pension fund managers must remain able to invest in the interests of their members,” said Poletti. “But their assets should also become an important resource for the country, and they could be used to develop necessary infrastructure.” The minister added that studies on how to achieve this goal are under way, but did not specify the next step – does it mean that pension funds will be forced to invest in public projects? Nobody knows.
Second, the slow pace of growth. Some 6.2m Italian workers are now members of pension funds, 6.1% more than last year, while assets have grown 11.6% to €116.4bn, which is still only 7.5% of Italian GDP. Around a third of members are in closed funds co-managed by employers and unions – or in older company sponsored funds. Their number decreased by 1% in 2013 due to persistent economic malaise. More self-employed people joined open funds – individual pension accounts managed by investment firms and similar to US IRAs – and PIPs, which are individual retirement accounts wrapped like insurance products and sold by banks or insurance companies.
But members of open funds and PIPs are also most likely to stop making contributions, and this is the third problem of the Italian industry – 1.4m pension fund members, 140,000 more than last year, are ‘silent’ and no longer contributing. While most are self-employed, there are also around 300,000 employees in this situation, meaning that the employers are not making their contributions either.
To relaunch the country’s pension funds, COVIP’s chairman wants to introduce automatic enrolment for new employees, allowing them to opt out within a certain deadline. That should go hand in hand with a new campaign to inform them about the necessity to save for retirement while the impact of the Fornero reform takes effect. Over just two years, 2012 and 2013, the new mechanism to adjust benefits to cost of living has cut €8.2bn from the pensions of 5.2m Italians. That represents huge savings for Italy’s state coffers, and a lot less money to spend for retirees. Future benefits will be even smaller as they will be all based on contributions.
Some experts, like Giuliano Cazzola, propose making pension funds compulsory. On the other hand, political parties like Lega Nord – which won 6.2% of votes at the European elections – would like to repeal the Fornero reform. Lega Nord has started collecting signatures to launch a referendum, although this will probably be deemed unconstitutional because it would concern fiscal issues. Other politicians are promising to water down the law and bring back some of the old rules on early retirement. This sounds good as a campaign slogan but is unlikely to be approved because it would be unsustainable for Italy’s budget.
However, in their favour, pension fund managers can boast that their 2013 returns were higher than the TFR accrual rate of 1.7% (75% of inflation plus 1.5 percentage points). The average return was 5.4% for closed funds, 8.1% for open funds, and 12.2% for PIP unit-linked funds.
However, if you look at the cumulative returns of closed pension funds since 2000, the evaluation is not so brilliant – they have returned only 48.7% versus TFR’s 46.1% as a result of market losses in 2001, 2008 and 2011. Having said that, the final results for employees are more than satisfying if you take into account company contributions.
The saddest note regards the many young Italian workers trapped in hybrid contracts as neither employees nor freelancers. They do not earn enough to join a private pension scheme and their compulsory contributions to a special fund managed by the public system are so meagre that their final benefits will be dangerously low.