Pensions In Italy: Auto enrolment all’italiana
A number of Italian pension funds have implemented automatic enrolment. Is this the answer to Italy’s low coverage problem? Carlo Svaluto Moreolo investigates
The Italian second-pillar pension fund system is growing members and assets at a healthy pace. Italian pension funds covered 7.2m workers at the end of 2015, according to the country’s pension regulator, COVIP. That figure represents annual growth of 12.1%. Total assets reached €140bn, an increase of 7.1%.
At a glance
• Employees in certain sectors are being automatically enrolled in second-pillar pension funds as part of new collective labour contracts.
• Only employers contribute on behalf of the new entrants.
• Membership numbers have grown dramatically, but assets are still growing slowly.
• There are tensions between supporters of different models of pension saving.
However, total assets held by second-pillar pension funds in Italy are small compared with other European countries. The membership figure is only 28% of Italy’s working population, which stood at 25.6m at the end of the period, according to the country’s National Institute of Statistics (ISTAT).
With over two-thirds of the working population lacking a complementary pension plan, projected declines in public pension provision, and planned rises in the retirement age, Italy is facing a greater challenge than its European peers.
Italian pension funds are taking individual steps to address this low coverage. A number of fondi negoziali – the industry-wide pension funds set up through collective labour agreements – have implemented a form of automatic enrolment.
This could prove to be a game changer. The 12.1% membership growth rate for 2015 compares to lower rates previously – 4.8% for 2014, 6.8% for 2013 and 5.4% for 2012. The higher figure is explained by the new entrants into the system through automatic enrolment programmes.
So far, three schemes have implemented automatic enrolment:
•Fondapi, the pension scheme for employees of small and medium-sized enterprises (SMEs);
•Cooperlavoro, the pension scheme for Co-operative workers; and
•Prevedi, the pension scheme for construction workers.
In each sector, the automatic enrolment programmes were sanctioned as part of new collective labour agreements reached over the past two years. The programmes were backed by trade unions and supported by employers as well.
Naturally, the social partners chose a ‘soft’ form of automatic enrolment, based on employer contributions. In other words, employees join the pension funds but are not required to part with their salary. Only employers are meant to top up salaries with a small contribution to the pension funds.
“The parties did well to introduce this automatic mechanism. Once someone is a member, and they understand what they are part of, they are more likely to become engaged”
“It is known as automatic enrolment, while I would call it ‘automatic education’, in the sense that it is a compelling opportunity for workers to learn about the benefits of saving into a second-pillar pension scheme”
Yet, after the signing of new collective contracts, membership increased at the funds involved. Prevedi, the construction workers’ scheme, now has more than 500,000 participants, making it the largest Italian pension scheme by membership. By comparison, the participant level had been under 40,000. However, as contributions only come from employers, the scheme’s assets have grown marginally to around €550m, up from €500m at the end of 2014.
There is broad agreement that these automatic enrolment programmes will be beneficial, not just to the individual funds, but to the system as a whole. If that is the case, Prevedi, Cooperlavoro and Fondapi could be seen as trendsetters.
Renato Guerriero, president of the European Association of Paritarian Institutions and global head of EMEA client relations at Candriam, welcomes the initiative. He says: “I think this kind of enrolment in pension funds accelerates the development of the complementary pension system in Italy. Italians show a propensity for saving, as shown by the strong growth in flows towards mutual funds. But, there is little awareness of the advantages of saving into contractual second-pillar pension funds.”
These advantages include the fiscal treatment, which is better for contractual funds than mutual funds, as well as the economies of scale and the benefits of collective bargaining associated with them.
Alberto Brambilla, chairman of Itinerari Previdenziali, a pension think tank, agrees: “I see no drawbacks. The parties did well to introduce this automatic mechanism. Once someone is a member, and they understand what they are part of, they are more likely to become engaged.”
As former undersecretary of the Italian labour ministry between 2001 and 2006, Brambilla worked on the design of the 2005 pension reforms. The law sanctioned that employees could choose whether their severance pay (trattamento di fine rapporto, or TFR) should be kept on their employers’ books or transferred to second-pillar pension funds.
The role of the TFR is crucial. The TFR contribution is paid by employers and equates to 6.91% of taxable salary. The value of each employee’s TFR fund is then increased each year by 1.75% fixed plus three-quarters of the inflation rate. The sum is handed to employees at termination of employment as a lump sum, and taxed between 24% and 43% according to its size and the employee’s seniority.
Historically, this serves two purposes. When it is kept on employer’s books rather than put into a pension fund, it serves as cheap financing for companies, particularly during periods of low inflation. At the same time, employees use it as a financial buffer during periods of unemployment or as a pension pot post-retirement.
For these reasons, using the TFR as a primary contribution to second-pillar funds could be seen as a shortcoming. There is a lack of incentives to support the growth of second-pillar schemes: employees do not want to part with a financial anchor, and employers are reluctant to relinquish an important element of their cashflows.
In fact, the 2005 law stated that, for a limited period, employees would be automatically enrolled. The TFR would be transferred to contractual pension funds unless they explicitly opted out. This ‘soft’ version of automatic enrolment had a short-term positive effect, with membership numbers rising fast. But that faded once the window was closed.
Instead, Brambilla points out that the automatic enrolment approach adopted by Cooperlavoro, Fondapi and Prevedi, based on collective agreements, is effective and the only real option to increase second-pillar coverage at this stage.
“The TFR is effectively deferred compensation, and state law cannot tell employees what to do with it, including putting into a pension fund,” says Brambilla. “Also, Italian employees already part with a large chunk of their salary to finance the state pension, therefore it would be very difficult to oblige them by law to save more money.”
This issue did not touch Prevedi, however. Long before the introduction of auto-enrolment at the scheme, COVIP, the regulator, had granted it an exemption. Employers are not required to transfer the TFR on behalf of Prevedi’s participants. Diego Ballarin, the scheme’s director, explains that this was originally achieved because workers in the construction sector rely heavily on the TFR during unemployment between projects.
The soft automatic enrolment option that Cooperlavoro, Fondapi and Prevedi have taken is the best in this context, according to Brambilla. He adds: “In the world, it is known as automatic enrolment, while I would call it ‘automatic education’, in the sense that it is a compelling opportunity for workers to learn about the benefits of saving into a second-pillar pension scheme.”
Employer contributions to Prevedi participants, according to Ballarin, range from €8 to €20 per month. The challenge now is to turn ‘contractual’ participants, or those that only save through their employers, into fully-fledged pension scheme members. The scheme is working with a network of local paritarian institutions in the construction sector, known as ‘casse edili’, to disseminate information about the scheme. This network helps Prevedi liaise with over 150,000 construction companies, many of which have under 10 employees.
What remains to be seen, adds Brambilla, is how successful Prevedi and the other funds are at convincing members into contributing their salary to their future pension pot.
However, the automatic enrolment initiatives of the three funds appear to be in contrast with current policy. Policymakers are discussing allowing employees to transfer their employers’ contributions from one pension provider to another. This was included in a wider draft law on market competition, DDL 2085, but had been criticised by contractual pension funds.
Sector representatives argued that for-profit pension providers, such as open defined contribution (DC) pension vehicles administered by insurance companies and banks, can exploit their commercial networks to gain market share.
That would be a disadvantage to contractual pension funds, which have no such networks to rely on. The contention was that if such a measure were implemented, large numbers of workers may choose higher cost, less prudent pension vehicles, with poorer pension outcomes.
The law is still under discussion, and it is unclear whether the measure will be approved. Brambilla argues that it is unlikely to happen. To achieve fuller competition within the sector, he says, contractual funds would have to be allowed to enrol members outside of their sectors of reference, and that is not a priority.
There is a wide variety of views on the issue, which suggests that the decision to implement automatic enrolment depends on power structures within individual funds.
Assoprevidenza, one of two pension fund associations in Italy, supports the idea of financing pension plans through collective labour agreements. Notwithstanding that, says Sergio Corbello, chairman of the association, employees should be able to opt out.
But, more importantly, Corbello argues employers and employees alike should provide an “adequate contribution”. He says: “Collective contracts should not foresee the transfer of a symbolic contribution. When sums under 10% of salary are transferred, we are looking at an optical illusion, rather than building a complementary pension plan.”
Assoprevidenza brings together all categories of pension funds. Its members can be both contractual funds, which were set up by one of many reforms in 1993, as well as ‘pre-existing’ pension funds, such as corporate plans, or open, for-profit DC vehicles. The other association, Assofondipensione, represents contractual pension funds.
Corbello says Assoprevidenza is not against portability, but says that such interventions should be carried out systematically, rather than in isolation. To improve second-pillar coverage, he adds, a more relevant measure would be moving from the current tax treatment, which taxes both returns and payout (exempt, taxed, taxed, or ETT) to an EET (exempt, exempt, taxed) model, where only payouts are taxed.
Yet the competitive tension between the different categories of pension providers could thwart plans to implement automatic enrolment at other funds. Osvaldo Marinig, former chairman of Priamo, the scheme serving public transport workers, and a senior figure at Confederazione Italiana Sindacati Lavoratori, one of Italy’s leading trade unions, suggests this might be the case.
Marinig says: “On one side, there are unions, such as the one I represent, that believe that portability of employer contributions, such as it is defined in the DDL 2085, is a calamity for the second-pillar system as it has been conceived and structured so far. On the other side, there are union forces that believe it is appropriate to give workers freedom of choice, since they are outside the realm of the confederate union movement.”
Marinig argues that giving workers freedom to transfer their employer contribution could “jeopardise the nature of the second-pillar pension system based on collective bargaining agreements”. This is because the paritarian nature of contractual pension funds would lose significance.
Additionally, Marinig points out that full competition between funds would be a burden on contractual funds, which carry a cost to employers that is based on collective agreements rather than market rates. The stability of the system, adds Marinig, would be further damaged by flows of assets in and out of existing funds.
This discussion, however, maybe overshadowed by the current debate on the government’s proposals to make the retirement age more flexible. Prime Minister Matteo Renzi’s cabinet is working on a plan consisting of an advance pension payment, to be obtained before full retirement age and repaid back within 20 years.
Claudio Pinna, head of consulting business at Aon Hewitt in Rome, says individual auto-enrolment initiatives are not a flash in the pan, and could segue into a discussion on mandatory participation in the second pillar.
He says: “The recent reforms have increased the requirements, in terms of age and contribution, for accessing the public pension system to a degree that is almost unsustainable. In order to address this need for flexibility, we need to build on the role of second-pillar funds. They could provide the advance pension payments that are needed to make retirement age more flexible, but that would require mandatory participation in them and the transfer of at least part of employees’ TFR.”