Regional funds reach the parts
The recent pension reform, approved by the former Berlusconi government with law decree 252/05, permits Italian regions to set up ‘regional’ pension funds. This development seems quite unique in Europe: why should regions be empowered to set up their own pension funds?
Under Italian law (law decree 124/93 reformed with law decree 252/05), there can be territorial funds as well as those set up by social partners, banks and insurance companies can set up pension funds.
Territorial pension funds are set up through collective bargaining agreements signed at territorial level, by territorial social partners, not at central level. For example, all social partners of the Trentino South-Tyrol Region signed a territorial collective bargaining agreement in order to set up Laborfonds, the pension fund for the workers operating in the Trentino South Tyrol Region.
Actually three territorial pension funds are operating: Laborfonds, as mentioned above, for all workers operating in the Trentino South-Tyrol Region (members 76,437 ; assets: €366m; market penetration: 31.2%); Fopadiva for the workers operating in the Valle d’Aosta Region (members 1,492; assets: €1.4m; market penetration: 4.3%); and Solidarietà Veneto, for the industrial workers operating in the Veneto Region (members 15,959; assets: €84m; market penetration: 4.6%). Territorial pension funds are quite successful: as of today, Laborfonds, the biggest Italian territorial pension fund, is the third largest Italian pension funds regarding the number of members.
In addition to territorial pension funds, in 1997 some regions like Trentino South Tyrol and Valle d’Aosta approved regional laws in order to actively promote memberships in second pillar pension funds among the population, creating and financing what is called a ‘territorial social protection project’ (for example ‘PensPlan’ in the Trentino South-Tyrol Region).
Other regions, like Friuli Venezia Giulia, Lazio and Sicily passed also similar regional laws, but are not yet operating.
Territorial social protection projects support territorial and all other pension funds by providing free communication and information services to the population with the objective of raising awareness for the need of second pillar pension savings. These projects further encourage membership in pension funds by introducing tax financed solidarity elements (contribution support to unemployed, guarantees etc,) reserved only for pension funds members.
These strategies have not yet enabled regions to set up their own pension funds, as law decree 252/05 now does. From January 2008, regions may set up pension funds directly, even without the assistance of social partners or banks/insurance companies, and even in the absence of collective bargain agreements, as long as they define and approve a regional law, where the activity of the region and the operation of the pension fund are explained in detail.
Once set up, regional pension funds are made fully equal to company, sector or territorial pension funds as well as to open pension funds set up by banks and insurance companies: workers can decide to become a member of one of these different funds, without further limitations.
Why do Italian regions have an interest in setting up such pension funds? Why may regional pension funds be a further option in increasing membership in pension funds stagnating for many years?
There are at least four reasons:
q Pension funds set up by social partners and banks/insurance companies are, as of today, not able to attract workers from small and medium sized enterprises (SMEs). These enterprises show a limited presence of activity of unions, and therefore are out of the scope of the Italian sector pension funds governed by unions and social partners. Open pension funds and other instruments provided for by banks and insurance companies are, on the other hand, much more costly than social partner pension funds and, up till now, inadequate for the needs of SMEs. Regional pension funds may therefore be a valid alternative, adding the credibility of a public institution with a ‘social’ cost structure.
q Public workers do not have access to pension funds in Italy (with the exception of the public workers of the regions Trentino South-Tyrol and Valle d’Aosta as well as state teachers). Having seen the difficulty and complexity in setting up nation-wide public sector pension funds, smaller regional pension funds may have the ideal size to provide more quickly regional public workers with a second pillar scheme, as the experience in Trentino South-Tyrol and in Valle d’Aosta is showing. The main purpose of Lazio and Siciliy in trying to become active in the second pillar promotion is, as written in the laws approved by the respective local governments, to set up a regional fund for regional public workers.
q Unfavourable selection in a second pillar pension scheme system such as the Italian’s, which is based on voluntary contribution, is a big social issue. As generally seen in Italy, members of second pillar pension schemes are today the older, more well informed workers living in the north, and working in large companies. Missing are female and younger workers, less well informed, living in the south, working for SMEs. Traditional pension funds are not able to reach all categories of workers. Once a reasonable level of membership is achieved, enabling the boards to manage the fund efficiently, further efforts are not generally made to increase their numbers: a substantial part of the target category of workers up till now remains without protection. Regional pension funds could be set up in order to effectively guarantee that second pillar protection is created for all categories of workers, even the weakest and less well informed on the subject, reducing significantly the unfavourable selection issue.
q Finally, since the contribution to a second pillar pension fund is mainly financed by employers transferring the so-called ‘trattamento di fine rapporto’ (TFR) to a pension fund, the risk exists that the liquidity drawn from Italian SMEs to pension funds is not compensated by sufficient private equity investments in SMEs done by Italian pension funds. Large Italian pension funds will hopefully support partially private equity investments in Italy, but will do so mostly in larger regions (eg, Lombardy, Veneto) where more private equity opportunities exist, with negative effects for SMEs located in economically weaker regions. Regional pension funds could at least partially address this issue by giving priority, to a reasonable extent, to more local private equity investments.
Michael Atzwanger is the managing director at PensPlan, based in Bolzano