The Italian job
Written by Peter Davy
Peter Davy discusses the dramatic reforms being made to the Italian state pension and the country’s reluctance to increase occupational pension provision
It’s proved difficult to persuade Italians of the benefits of occupational pensions. Despite numerous reforms to the first pillar and attempts to boost the second over the past couple of decades, the private pensions market in Italy has remained tiny, with assets of about three per cent of GDP.
Previous efforts to bolster that have met with little success. Most recently, it was Romano Prodi’s government’s attempt in 2007 to persuade workers to put the Trattamento di Fine Rapporto (TFR) into pensions. Instead, they mostly chose to keep the fund, into which 7.41 per cent of workers’ gross pay is saved each year of employment, accessible and rely instead on the – traditionally generous – state pension, despite reforms to reduce it.
“People don’t understand the state pension is going to be much lower than their parents get today and that they will need to save much more in future,” says Dexia Asset Management global head of European client relations and former head of the Italian branch, Renato Guerriero.
However, the changes to pensions under the austerity package passed by the Italian Parliament before Christmas – the Decreto Salva Italia (Decree to Save Italy) – should help get the message across.
Recently appointed welfare minister Elsa Fonero broke down in tears at a news conference outlining the reforms. Barely able to get her words out, she told reporters: “This has cost us also psychologically; we have had to ask for a…” she said before trying to compose herself.
“I think she meant to say sacrifice,” leader of the technocratic government Mario Monti interjected.
A long time coming
The reforms will see the retirement age increased to 66 for both men and women in the public and private sector by 2018; future retirement ages increasing in line with life expectancy from next year; contribution-based, rather than final salary-based, benefits applied to all workers (previously many were exempt); a minimum 20 years service required to claim a pension; and inflation indexation dropped for pensions above €1,400 a month. Scope for early retirement – long a problem in Italy – is also curtailed: Those who could claim after 40 years’ of contributions will, from this year, need 42 years and one month of contributions if they are men and 41 years and one month if women; from 2014 that rises to 42 and 41 years plus three months, respectively.
In a sense the focus on pensions is surprising. Only in September, the IMF’s Fiscal Monitor report noted that Italy’s pensions system would see one of the lowest increases in pensions spending among the advanced countries over future decades. That’s partly because Italy is already grappling with the demographic problems that will hit others only in coming decades. But it’s also because successive governments have already introduced significant reform from 1995 onwards. Indeed, these formed much of the basis for the recent proposals.
“The minister didn’t really drastically change the system because most of the changes had already been decided,” says Guerriero.
However, lower growth and increasing demands for Italy to tackle its debt have seen implementation of these provisions tightened, brought forward and added to.
“In Italy generally when pension reform is announced it has been years away. In this case the reform has been approved in December and it’s in force from 1 January,” says Mercer Consulting Italy head of the retirement, risk and finance business Marco Pistamiglio.
“It is probably the most important pension reform ever made by an Italian government,” he adds.
At Aon Hewitt, head of consulting for Italy Claudio Pinna says it’s a dramatic change for workers and pensioners.
“In the past we probably had one of the best public systems in the world, and now we are going to have one of the worst,” he says.
In any case, there is a feeling that the revisions and tinkering that have characterised the state pensions system in Italy over the last couple of decades are now at an end, with Italy now set on a sustainable system with costs expected to stay in line with other European countries (at about 14 per cent of GDP).
“I think Elsa Fornero wanted to put in place a final point to pension reform so that there’s now no need for changes in future,” says the country’s largest asset manager, Eurizon Capital Sgr head of Italian institutional sales Michele Boccia. “This is it.”
The occupational market, however, will be hoping things are just getting started.
Making the case
On the one hand, the changes to the social security system itself can’t harm public awareness of the need for greater saving, according to largest private pension fund in Italy, Cometa Pension Fund general director Maurizio Agazzi.
He says: “The prospect of reforms of the first pillar, in particular the speed-up towards a contributory pension scheme, should bring a higher level of awareness of the necessity of a second pillar.”
On the other, it’s proved notoriously difficult to persuade Italian workers to put their trust in occupational schemes. There have been considerable efforts to promote them in the past: advertising campaigns as well as specific initiatives with forums such as La Giornata della Previdenza (a national pensions day). The Italian media have also contributed to efforts to widen awareness, says Generali Investments head of global distribution Carlo Cavazzoni.
“The result is that Italians are now more conscious of the problem,” he argues.
So has that meant greater participation?
That assessment is backed by figures from Mefop, the Association for the Development of Pension Funds, which show little appetite for rushing into workplace saving. From January to October 2011 occupational memberships fell by 0.5 per cent, it says (although personal pensions schemes did see a big increase: with a 16 per cent increase in insurance contracts written over the period). At the end of 2010 (the latest for which it has figures available) Mefop put the coverage rate of pensions funds in the second and third pillar at just 23 per cent of the population.
Mefop general director Luigi Ballanti supports a new publicity drive. “The new government should act on more financial literacy and a new mass-media campaign to try to increase membership,” he says.
It might take more than that, however.
For a start, if workers haven’t been stirred by earlier campaigns and the falling replacement ratio they faced following earlier reforms, the new moves may do little to alter that.
“The new benefits formula was essentially established in 1995, but people have just failed to recognise its impact,” points out Towers Watson senior consultant in Rome Andrea Scaffidi.
There’s a more obvious problem, too. Trying to push retirement savings in the midst of what looks like another recession this year is likely to prove difficult.
As Boccia says: “The reason why pension schemes are not succeeding is that people do not have money to save.”
More to come
What’s needed, say most, is something tangible from the government.
Exactly what is another question. An increase in tax incentives would be one possibility, but is unlikely given the constraints the government faces.
Some form of compulsion would, likewise, help to boost the second pillar. That’s one thing State Street Global Advisors country head for Italy Marco Fusco would like to see.
“The fact there is no obligation to adhering to complementary schemes is certainly one of the reasons why it hasn’t picked up as many people would have wished,” he says. “In other countries when you create a second complementary pillar you have some sort of obligation to go into it.”
That’s still a possibility. However, it’s worth noting that in her former role with CeRP (the Centre for Research on Pensions and Welfare Policies) Fornero was against compulsion on the basis that workers largely only had the option of DC schemes, giving them no guarantees.
There is another possibility, however. Boccia notes that the recently-passed law also includes provisions for a new commission to look at the contribution Italian companies make towards financing the state pension – amounting to about 30 per cent of the workers salary. This commission will evaluate the possibility of redirecting a portion of that to finance private pension schemes. It’s unlikely to be large but, says Boccia, considering that most workers set aside two per cent at most into their schemes, even if it is only a couple of per cent of salary it could make a big difference. “It could be very interesting.”
Most expect some move from the government to address private sector pensions in coming months. However, we probably shouldn’t count on it. The recent downgrade in Italy’s credit weighting is just one reminder of the potential for further upsets to scupper government plans, and there may yet be more tears before Italy’s pension problems are finally solved.
Written by Peter Davy, a freelance journalist