The 2019 budget allocated funds to allow more favourable early retirement but its impact has been limited
- During the 2019-2021 period, 62-year-olds with 38 years of contributions have the right to retire
- This is five years earlier than the statutory retirement age of 67
- The take-up of the option and the associated costs have been limited
- The government has no urgency to strengthen second-pillar pensions
The latest buzz-phrase in Italian pensions is ‘Quota 100’. This odd expression identifies a hotly debated measure contained in the most recent budget law. It involves lowering the age threshold and contribution requirements for accessing the state pension.
Quota 100 gives retirement to workers at 62 years of age who have contributed to the public pension system for 38 years. The measure takes its name from the sum of the stipulated age and years of contributions required to access the state pension.
Easing the requirements to access the state pension was one of the top priorities for Italy’s coalition government when it took power in June 2018. The two coalition parties, the right-wing League and the anti-establishment Five Star Movement, had both campaigned to dismantle the 2011 pension reform. That reform was passed by the then technocratic government to rein in spending. It introduced burdensome age and contribution requirements for retirement. Until the beginning of this year, before the Quota 100 measure took effect, workers could retire at 67, and the retirement age was scheduled to rise further, along with increases in life expectancy.
The approval of Quota 100 took some doing. Because the measure required an increase in the state budget, it put the government at odds with the European Commission. The Commission took issue with the planned rise in spending, and even threatened to enact an excessive deficit procedure. In the end, a deal was struck with a defiant Italian government and the Commission took no action.
The government and its supporters saw this as a victory against an authoritarian Commission. However, it must be noted that Quota 100 is a temporary measure. The option to retire early will only last for three years. Unless new measures are written into law, the previous arrangements will be reinstated from 2021.
The jury is still out on the effects of the measure. The government had estimated that up to 650,000 workers would take up the Quota 100 option. However, INPS (Istituto Nationale della Previdenza Sociale), the main organisation managing the public pension system, estimates that by the end of this year the number will be about 205,000.
Fewer workers than expected are taking advantage of Quota 100 because there is a penalty, albeit small, in terms of benefits for retiring early. But the lower take-up also means lower-than-expected costs for the government. Quota 100, plus a host of other measures allowing early retirement to specific categories of workers, will cost up to €30bn until 2027, which is far lower than the €46bn earmarked by the government, according to pension think tank Itinerari Previdenziali.
Second pillar resists government neglect
In government and at parliamentary level, the discussion on the future of the Italian pension system seems to be stuck on first-pillar pensions. Calls to further strengthen the second-pillar system have been largely ignored. The government’s disregard for second-pillar pension funds was apparent at the 2018 end-of-year meeting of Assofondipensione, one of the most prominent associations of second-pillar funds. Giovanni Maggi, Assofondipensione’s president, lamented the absence of a labour ministry representative at the meeting, despite an official invitation.
Second-pillar funds are growing, nonetheless. COVIP, the pension fund regulator reports that coverage of second-pillar pensions rose 4.9% between 2017 and 2018, reaching 7.9m members, or 30.2% of the workforce. Several industry-wide pension funds, in particular, are growing thanks to a mechanism of quasi-automatic automatic enrolment introduced by trade unions and employer associations. The industry-wide sector has grown by 6.8% to 3m members over the period.
Assets in the second-pillar sector grew 3% during 2018, to €167bn. This is low relative to other countries and to Italy’s GDP (9.5%). But the level of assets was affected by the poor returns on investments registered by pension funds last year. Contribution levels are healthy, despite the sluggish state of Italy’s labour market. Second-pillar funds as a whole collected €16.3bn in contributions during 2018, as industry-wide pension recorded a 5.7% in contributions from the previous year, equating to €5.1bn.
Pension funds have been busy implementing the requirements of the EU’s IORP II directive, which involves significant changes to their way of operating. The directive requires funds to integrate a risk management function, which they have historically been lacking. However, this is likely to further speed up the pension funds’ portfolio diversification efforts.
There are signs that Italian pension funds are shifting from the traditional 60% bonds/40% equities ratio to a more sophisticated asset allocation model. Individually, many funds have raised their allocations to alternative assets, particularly in the private market.
Earlier this year, a group of industry-wide pension funds announced that it had formed a consortium with the aim of investing in private equity funds, primarily focusing on Italian companies. The five funds pooled €216m of assets to make their first private equity investments as a group. The consortium, called Progetto Iride (Project Iris), is widely seen as a model for other groups of funds to team up and invest in alternative assets, with a focus on the Italian economy.
At the time of writing, the consortium was evaluating 20 offers received from private equity managers, and a decision was expected before the end of the year. It is likely that further joint initiatives of Italian institutional investors to deploy capital in private markets will be announced in the coming months. Assofondipensione, the pension fund association, has pushed for the involvement of Cassa Depositi e Prestiti, the state-owned investment bank, in future joint initiatives.
Reform measures failing
Alberto Brambilla, president of Itinerari Previdenziali, and a former senior civil servant in the welfare ministry, says that the government’s reform efforts are falling short in more than one way.
As well as having a time limit, Quota 100 is unlikely to achieve its employment and consumption objectives. The government pushed for the measure on the grounds that early retirement would free up jobs, increase employment and, therefore, raise consumption. Lawmakers went as far as forbidding beneficiaries of Quota 100 to do paid work, to ensure that those retirees would effectively be replaced by new hires.
Itinerari Previdenziali estimates that the turnover rate in the private sector is now about 10%. This means that for every 10 retirees one person gets hired. In the public sector, because of the lengthy processes for new hires, the rate will not improve, and the ratio of workers to retirees will worsen. The effects on consumption will therefore most likely be muted.
Brambilla had designed a pension reform plan on behalf of the League party. His plan, which involved measures to grant early retirement, became part of the League’s manifesto. The actual reform is quite different from the original design. Brambilla notes, however, that Quota 100 has achieved one important goal: many workers were nearing retirement before the 2011 reform kicked in, which raised the stakes. The measure allowed a significant number of those workers to retire based on the pre-2011 reform rules, which were deemed to be more acceptable.
There is no indication of how the government intends to proceed with its efforts to overhaul the current regime. A permanent reduction of the statutory retirement age is under discussion, but any measures of the kind will require additional spending. The government has little room for manoeuvre and further disputes with the European Commission are likely.