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TFR transfer agreement could be €5bn boost to Italian pension funds

ITALY - A compromise reached in Italy will see approximately one third of the €19bn expected yearly in severance payments (TFR) being transferred into private pension funds, one third going into a state pension fund (INPS) and one third staying with small companies, the government estimates.

The agreement was signed by the government, unions and employers after years of negotiations. However, it is not yet clear whether it will have the desired effect of strengthening the second pillar system.

From January 2007 under the so-called "silent consent system", TFR money paid by companies with over 50 employees will be transferred into pension funds, unless employees specifically choose for their money not to go into the second pillar. In that case the TFR funds will go into the INPS social security state fund. TFR funds accrued until 2007 will remain with the companies.

Companies with fewer than 50 employees can keep the TFR money. This compromise was reached so as not to increase financial strain on smaller companies, which in fact make up 99% of Italian companies. Initially the government wanted to set the threshold at companies with fewer than 10 employees.

"This measure is equivalent to building up a new public pillar," says Marcello Messori, former head of Mefop, the Foundation for the Development of the Italian Pension Funds Market .

"Next to the standard first pillar you will have a new small public pillar. In Italy our problem is that the first pillar is already too heavy. The solution for a decline in funding in the first pillar should be to strengthen the second pillar not build a new first one," he said.

Piero Marchettini of Adelaide Consultants disagrees: "In my opinion it could be a good booster for the pension funds because it is quite unlikely that the workers will allow their TFR into social security fund."

He adds: "The image of the social security institute is not very good. It is that of a pension fund which is making promises that it will not be able to fulfil."

"The government expects €6bn to go into the state fund. In fact it expects only 20% of people to chose to invest their future TFR payments in the second pillar. This is a very low ratio," Messori of Mefop explains.

Similarly, centre-right economist and MEP Renato Brunetta fears a negative impact on private pension funds as the state fund is seen by many workers as offering firmer guarantees and being less risky than the second pillar.

However, Marchettini is convinced that with the reform Italians will be more willing to invest in second pillar solutions, as they have more choice: "So far they left the money in the TFR because in many cases they did not trust the supplementary pension funds run at national level by unions and employers association.

"But now with the reform it will be possible to have a real choice: Either to leave the money, to put it into national category funds or to channel the money into open funds managed by asset managers, by insurance companies, banks and so on.

"I think the fact that there will be choice of asset managers will render second pillar solutions more credible. Furthermore, the larger companies are the ones where there is a better knowledge of the pension system."

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