Italy: New government prioritises public pension overhaul
Planned reform of first-pillar pensions will overturn some key changes introduced after the onset of the euro-zone crisis
• The new government aims to ‘overcome’ the 2011 Fornero reform
• The goal is to reduce the retirement age and streamline the system
• The impact of the proposed reform on Italy’s fiscal sustainability is uncertain
• No significant policy changes are foreseen to improve second-pillar pensions
Italy’s new government, in power since June, has signalled that pensions are top of its agenda. Prior to the general election in March, both the coalition parties – the centrist Five Star Movement and the right-wing League – had campaigned vehemently to overturn the effects of the 2011 Fornero reform once in government.
The reform triggered a significant rise in the statutory retirement age and generally means lower public pensions in the future. In a document called Contract for a Government of Change, which outlines the government’s agenda, ‘overcoming’ the Fornero law is a the priority.
At the time of writing, a formal reform draft had yet to be presented. However, some key details of the proposal have been circulating for months. First, there was the suggestion that the government would allow retirement when a worker’s combined age and years of contribution add up to 100. This way, someone who has worked since the age of 20 could retire after their 60th birthday.
By comparison, the statutory retirement age in 2019 will be 67. This keeps rising, as planned by law, to keep up with demographic projections. In reality, however, people on average retire at about the age of 62. This is the result of the complicated legislative framework, which effectively means every worker’s personal circumstances can contribute to bringing his retirement age forward.
The plan, branded ‘Quota 100’, was lambasted by critics who said it was not financially sustainable and that it would significantly increase the country’s budget deficit. Some of the finer details of the new system were unveiled earlier this year by Alberto Brambilla, the high-ranking civil servant who designed the reform proposal.
Brambilla is a welfare expert who has worked on several pension system reforms for previous governments. He is also head of Itinerari Previdenziali, a pensions and welfare think-tank. In his proposal, workers will be allowed to retire at 64, provided they have contributed to the system for 36 years. They will be able to retire earlier if they have contributed for 41 years.
A key measure in Brambilla’s plan is to scrap the link between contribution age and life expectancy. On his think-tank’s blog Brambilla called this mechanism one of the “gravest mistakes” of the Fornero reform. It is partly what caused a significant and sudden rise in statutory retirement age. The mechanism, he points out, means that workers will soon need 45 years of contributions to access retirement, “a requirement that is not needed in any OECD pension system”, he says.
In Brambilla’s proposal the link between retirement age and life expectancy would be kept. Similarly, he would keep a provision to review, every three years, the coefficients for calculating benefits in relation to contributions. Both measures were introduced by the governments he previously worked for.
The proposed reform includes re-introducing inflation-linked benefit increases. The overarching goal of the reform, however, is to lower the retirement age and streamline the rules. Brambilla’s argument is that the Fornero reform was too harsh and complicated the system.
Indeed, since the 2011 reform, successive governments have passed eight ‘safeguard’ laws to allow more than 130,000 workers to retire with pre-Fornero rules. These workers had already agreed to retire with their respective governments at the time of the reform. They would have found themselves without a pension for years, unless the government intervened as it did.
Other workers, about 45,000 according to Brambilla, will be eligible for APE Sociale, a new, temporary benefit for workers who are near retirement but not yet eligible for a public pensions under current rules.
In last year’s budget law, the government also expanded the list of ‘burdensome’ jobs. Workers in such occupations are exempt from the stringent rules regarding retirement age contained in the Fornero law. This, argues Brambilla, constitutes a ‘pensions jungle’, where each category of worker was treated differently. His proposal foresees similar treatment for all categories of worker, with flexible access to retirement for all.
Following the release of these details, the debate has focused on the impact of the reform on the country’s coffers. Istituto Nazionale della Previdenza (INPS), Italy’s social security agency, had estimated a €20bn yearly shortfall until 2030 from scrapping the Fornero reform, but this estimate was based on the earlier ‘Quota 100’ details. Later estimates foresaw a lesser impact. Brambilla estimates it will cost €5bn a year for 10 years following the reform.
The debate became heated earlier this year when rating agencies put Italy’s rating on review. This based on the contention that raising expenditure on pensions, coupled with the other expansionary policies promised by the government, would grow Italy’s total budget deficit further. Many fear that would have negative consequences for Italy’s solvency, given its high debt-to-GDP ratio (currently over 130%). This, however, assumes the country is not able to reduce expenditure elsewhere or increase its GDP growth rate through other means.
Whatever the impact, it seems likely that the government will attempt to both lower the retirement age and at least maintain pension benefit levels. Critics say that the government should spend on items other than pensions. Italy, they point out, has among the highest expenditure on pension and welfare in Europe, second only to Greece. But the government wants to go further and raise minimum pensions.
Earlier this summer Luigi di Maio, deputy prime minister and minister for economic development, said the government will cut ‘golden pensions’, meaning those above €4,000 per month. This could save about €1bn, according to Di Maio.
Lack of focus on complementary pensions
Pensions might have been a big selling point within the programme that got Italy’s new government into power. However, the ‘Contract for the Government of Change’ signed by the coalition partners does not contain a single mention of complementary pensions. The sector is growing in terms of members and assets, as shown by the figures released earlier this year by COVIP, the pension regulator. Assets and members grew more than 7% and 6% during 2017, respectively.
However, assets in second-pillar pension funds are just over €160bn, according to COVIP. Second-pillar pension funds cover under 8m people, or less than a third of the working population. These figures are low compared with European countries of a similar size, in terms of population and GDP.
The last significant measure hoped to boost second-pillar pensions was the introduction of RITA (Rendita Integrativa Temporanea Anticipata). This is an option to access retirement savings in second-pillar pension funds prior to retirement under certain conditions. It sounds incompatible with the goal of growing retirement savings. But the policymakers’ view was that giving more flexible access to savings would make pension funds more attractive.
It is too early to tell whether the measure will have the desired effect, but many in the industry have praised it. No other measures to grow second-pillar pension savings are officially in the pipeline.
Meanwhile, Italian pension funds have taken advantage of the less restrictive regulatory framework for investment. Many have taken steps in alternatives and ESG, as shown by the steady flow of mandate searches in these two key areas.