Consultants and other pensions experts have been calling for pensions reform in Italy for years. But, says Piero Marchettini, managing partner at Adelaide Consulting in Milan, nothing has really moved forward.
“We are in exactly the same situation.” And the frustration is likely to continue for a while yet. With an election due to take place in June, long delays in the passage of difficult legislation are inevitable.
A new draft of the law on social security and supplementary pensions has finally been put forward. But within the proposals there are still many unsolved issues, consultants say. They are concerned that the government appears to have been dragging its heels over a reform that it, perhaps, doesn’t feel the need for.
“But the majority of experts strongly believe a reform is urgent and necessary,” says Livio Mocenigo, senior consultant and partner in the benefits practice of Watson Wyatt Italia in Milan.
However, changes in accounting principles are keeping consultants busy on the actuarial side. As companies implement IAS 19, many require a valuation of severance pay (TFR), though this only applies to listed companies.
Apart from the valuation needed under the new accounting rules, the TFR and how to manage it continues to be a hot issue for government and employee representatives alike. The TFR is a feature peculiar to the Italian pension fund market. It is a lump sum paid to the employee when the job comes to an end.
For some time, the government has been looking at ways to allow TFR reserves into pension funds. Under the latest draft legislation, the TFR would be transferred into a pension fund automatically, unless the employee specifically requests that it does not. Consultants are sceptical that this legislation will be passed, however. Any anyway, most employees, they say, would far rather have a lump sum than what would turn out to be a relatively small amount in pension income.
The proposal is that these rules on the TFR would continue for three years in order to gauge how many employees would, in practice, object to the transfer. Depending on the outcome, it is then possible that the government would move to make the transfer compulsory, says Guido Blasco of Hewitt Associates.
But details are still unclear, he says. Whether the TFR money would be channelled into the closed pension funds at the company level or into open pension funds run by the insurance companies is not certain. And with the election looming, there is unlikely to be any early progress on this. “Whatever is not easy will most likely be postponed,” says Blasco.
Marchettini says pensions consultants face competition not only from each other but also from investment institutions offering advisory services. Although they cannot claim independence, a couple of the banks are offering asset allocation and manager search services. Unfortunately, many potential clients are prepared to believe in the free lunch, he says. “In Italy, conflict of interests is not the first issue,” he says.
Mocenigo says most of the investment providers have an internal organisation which goes out to companies to sell their products. Some of the banks have set up subsidiaries which exist solely for the purposes of marketing their open pension funds.
“The culture of employing a consultant, of doing a retirement study, is very new in Italy,” he says. But consultants, with their independence, do add value, he says. Watson Wyatt, for example, uses software to interview the company and then analyse those results, determining what the client’s precise needs are and then finding the best provider.
“Corporate clients should turn to a consultant to have a clear view of what the scheme options are, what are the costs involved in setting up the plan, the value of leveraging the pension capital, and so on,” says Mocenigo.
In the benefits area, Blasco says consultants are still waiting for the government to give the final definitions that will be used in the pensions reform.
This may turn out to be a good opportunity for consultants, he says, because the government has had intentions to change the rules for early retirement. Today, the rules are very liberal he says, with employees able to stop work at age 57 with no penalty. But under new rules this lower limit may be raised to 60, with 35 years of contributions. If this goes through, Blasco points out that employers would have less mobility in their staffing.
On the staff compensation side, the situation remains soft, he says, mainly because company revenues have been too poor to allow extra staff rewards. In the last quarter there was no increase in Italy’s GDP in real terms, he says. Although stock-related plans are benefiting from a favourable tax and legal scenario, Blasco says companies don’t seem to be good at implementing this type of plan.

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