Pensions and politics are seldom friends. Politicians, more often than not, seek short-term policy impact; pension systems take time and patience to develop. This tension is unravelling in Italy. The new rules on pension savings recently introduced by Matteo Renzi’s government risk undoing all the good policy work that has been done over the past 20 years.
Italy has done the groundwork to develop a good system, setting up a fully funded second pillar and introducing notional defined contribution in the first pillar. But, in the past year, Renzi’s government has increased taxes on pension fund returns (bar government bonds, unsurprisingly) and broadened the scope for accessing pension savings before retirement.
Thankfully, initial data on the number of workers accessing savings early shows that Italians may prefer keeping money in their pension funds. Furthermore, the tax treatment of second-pillar pensions remains the most favourable compared with other forms of savings, even after the rate increases.
More worryingly still, a draft bill opens the market to competition for pension savings from commercial entities.
Competition is good in theory, except that insurance companies and banks are far more likely to benefit from this bill than workers. The bill would allow portability of pension savings, including employer contributions, towards commercial entities. These can exploit deep distribution networks that are not available to occupational funds. However, at this stage, the bill does not open up the whole market: ‘closed’ occupational pension funds, linked to labour contracts, would remain closed to contributions from outside those agreements. Because of the competitive advantage of insurers and banks, workers are very likely to subscribe to commercially operated pension schemes, with higher costs and less prudent principles.
Trade unions, employers’ associations and associations representing occupational pension funds have voiced their opposition to the bill. They say the policy measure serves the interest of a lobby, rather than the whole sector, and that it damages pension savers. Whatever the outcome of the legislative process – the bill is unlikely to be approved as it is – this uncertainty is detrimental to Italian workers.
If and when the economy picks up, many young Italians entering the job market will have to choose whether they want to build a second-pillar pension, on top of the 33% share of their salary that is taken to finance public pensions. Consider that taxes on second-pillar savings have risen, add the uncertainty surrounding the financial markets, and you can understand why so few Italians, less than 30% of the working population, save into a second-pillar pension.