Pension Funds within the Italian Pension System: update following to the 2007 and. EFRP General Assembly Meeting Rome, 8th November 2010

Transcription

1 Pension Funds within the Italian Pension System: update following to the 2007 and 2010 reforms Michael Atzwanger, LL.M.

2 1. The Italian pension system: an overview 2. The 2007 reform for boosting the 2nd Pillar and the recent budget interventions on 1 st Pillar 3. The 2nd Pillar after the reform of 2007

3 1. The Italian pension system: an overview The Italian Pension system is made of three pillars: 1) Public, compulsory and unfunded pay-as-you-go system 2) Private, voluntary and collective funded system 3) Private, voluntary and individual savings related to social security needs 3

4 1. The Italian pension system: an overview The Italian Pension system is made of three pillars: (...) 1) Public, compulsory and unfunded pay-as-you-go as you system The first pillar consists of a compulsory pay-as-you-go insurance comprising various branches. The most important are pension insurance for employees and dfor the self-employed l and retirement pensions for civil il servants. As there were various reforms and amendments to the Italian pension system, the pension level and the statutory retirement age depend on a set of complicated pension rules. Until mid-nineties this pillar was based on an earnings related scheme since the pension level of each retired employee was determined by the amount of salaries with a rate of substitution between pensions and salaries was closed to 100% or little less. The reforms introduced in the second half of the Nineties keep up the PAYG system; however, the current reformed system mimics i a funded d system and the rate of substitution started to decrease. 4

5 1. The Italian pension system: an overview The Italian Pension system is made of three pillars: (...) 2) Private, voluntary and collective funded system From the begining of the Nineties the Italian Legislation introduced Pension Funds and, starting from 1996, the Dini reform implied a gradual shift of the first pillar from defined benefit to defined contribution system. At the same time a second private pillar was gradually introduced. The Italian Pension funds can be divided into three broad subsets: (i) the so-called Contractual pension funds which h are mainly created by employers associations as well as trade-unions on the basis of occupational schemes, geographic areas, or individual big firms, but these funds can also be the result of direct agreements between (self-) employees, and (ii) the so-called Open pension funds which are founded by banks, insurance companies, and savings management companies. (iii) the so-called PIP which h have the form of private individual id insurance schemes managed by insurance companies 5

6 1. The Italian pension system: an overview The Italian Pension system is made of three pillars: (...) 3) Private, voluntary and individual savings related to social security schemes In the third pillar there are the savings that individuals accumulate on other financial instruments and in some way related to personal social security. They can have the form of assets offered by insurance companies, banks or others on individual basis. 6

7 1. The Italian pension system: an overview 2. The 2007 reform for boosting the 2nd Pillar and the recent budget interventions on 1 st Pillar 3. The 2nd Pillar after the reform of 2007

8 2. The 2007 reform and the recent budget interventions Defined Benefit - Defined contribution Mixed System Relationship: rate of substitution between pensions and salaries Source: Inps 8

9 2. The 2007 reform and the recent budget interventions Recent budget interventions on 1 st pillar (revision of coefficiente di trasformazione based on life expectancy) will hopefully improve its public finance sustainability 18% 17% After 2007 reform 16% 15% After 2010 reform 14% 13% 12% Source: Ragioneria generale dello stato, estimate 9

10 2. The 2007 reform and the recent budget interventions Defined Benefit - Defined contribution Mixed System Relationship: rate of substitution between pensions and salaries Age Source: ENPAV National Congress 2008 Working years 10

11 2. The 2007 reform and the recent budget interventions Effects of recent budget interventions on replacement rate, less benefits tomorrow 80% (Hp: age 63, working years 35) 70% Employee 60% 50% 40% Self employed 30% 20% Without revision of "coefficienti di trasformazione" With revision ii of "coefficienti i idi trasformazione" Source: Ragioneria generale dello Stato, estimate 11

12 2. The 2007 reform and the recent budget interventions A 2nd and possibily 3rd pillar is more and more needed Estimate t of the effect on 2nd DC pillar under favourable hypothesis onthe levell of contribution (100% of severance pay) and rate of returns (2.5% net of costs p.a.) 80% 70% 60% Employee 50% 40% Self employed 30% 20% Source: Ragioneria generale dello Stato, estimate I pillar I and II pillar 12

13 2. The 2007 reform and the recent budget interventions Pension Funds Assets VS National GDP Iceland Switzerland Netherlands United States Australia United Kingdom Canada Finland Ireland Denmark Slovak Japan Sweden New Zealand Portugal Spain France Poland Norway Hungary Mexico Austria Belgium Germany Czech Italy Korea Turkey TFR (i.e. severance pay) poured in 10 years Source: Boeri, Bovenber, Coeurè, Roberts, Dealing with the New Giants,

14 2. The 2007 reform and the recent budget interventions Complex rules and the need of information Whichh source of information on topics related with the TFR rule do you plan to use? Don t know Other (consultants, fiscalexperts,...) Official Government TFR web site Insurance/bank Other web sites TV/Radio Word of mouth Papers Own company/employer Trade Unions Source: Boeri in Congress FT Global Events TFR come tardiva e fallimentare riforma - Milan

15 2. The 2007 reform and the recent budget interventions The new legislation now formally requires the transfer of severance pay (called TFR Trattamento Fine Rapporto ) from companies book reserves to a pension fund (or a private social security scheme) unless the employee explicitly forbits it by signing a declaration not to transfer. Upon termination of employment for any reason, employers have to pay the TFR to all employees. In Italy the TFR serves as a backup in the event of redundancy or as an additional pension benefit after retirement. Severance pay is calculated as 6.9% of each year s annual salary, revalued on the basis of 75% of inflation plus a fixed rate of 1.5% during the period of accrual, and is paid as a lump sum. Assuming that the TFR benefit is accumulated throughout h a full career, it is expected to provide a pension of 10% to 15% of final pay. Companies have been using the TFR as internal financing vehicles and were/are normally reluctant to this Reform although the law does compensate them with other benefits and allows companies with less than 50 employees to manage the TFR as before (i.e. are exempt from compulsory TFR rule). 15

16 2. The 2007 reform and the recent budget interventions Italy applies the ETT taxation model (Exempt-Taxed-Taxed) CONTRIBUTION PHASE (Exempt) Employee and company contributions are tax deductible of the amount of EUR 5,165. (For public employee apply the rule the lesser of the following amount: 12% of total income; (2) EUR 5,165; (3) 2 times the amount of TFR accrual contributed to the fund ) Company contributions are tax-deductible as labour costs The self-employed may contribute to an open pension fund on a tax-deductible with an annual maximum of EUR 5,165; Contributions made by the employer, except those coming from an annual allocation of TFR, are subject to the social security solidarity contribution of 10%. Contributions made by the employee are subject to the normal social security contribution rate. In case of withdrawal earlier to the retirement age (possible only after at least 5 years of membership), benefits are taxed at an income tax rate from 9% to 15%. (The option is available even on TFR sums on companies book reserves but not earlier than 8 years of employment and taxed > 23%). ASSET MANAGEMENT PHASE (Taxed) Pension Funds returns are taxed 11% on the amount of annual earnings RETIREMENT PHASE (Taxed) Benefits paid out as an annuity are taxed as normal income at an income tax rate from 9% to 15%. 16

17 1. The Italian pension system: an overview 2. The 2007 reform for boosting the 2nd Pillar and the recent budget interventions on 1 st Pillar 3. The 2nd Pillar after the reform of 2007

18 3. The 2 nd Pillar after the reform of 2007 The 2007 Reform had a significant effect to the development of the Italian 2nd pillar with respect to the previously reached levels; although in recent years the number of new members is increasing quite slowly, driven exclusively by insurance companies and banks with a strong distribution power. 18

19 3. The 2 nd Pillar after the reform of 2007 Second Pillar over the years: members and assets Members Assets(/1000) Source: Covip 19

20 3. The 2 nd Pillar after the reform of 2007 Italian 2nd and 3rd Pillar vehicles: membership Closed fund prevails, growth of insurance products. Overall participation still too low. 2,200,000 2,000,000 1,800,000 1,600,000 1,400,000 1,200, ,000, , , , Q3 Closed pension fund Open pensione fund Life insurance (new style) Pre-existing pension fund Members as a percentage of employees (participation rate) dx 35% 30% 25% 20% 15% 10% 5% 0% Source: Covip 20

21 3. The 2 nd Pillar after the reform of 2007 Italian 2nd and 3rd Pillar vehicles: assets 50,000 mln 100,000 45,000 40, , ,000 30,000 60,000 25,000 20,000 40,000 15,000 10,000 20,000 5, Q3 Pre-existing pension fund Closed pension fund Open pensione fund Life insurance (new style) Total - Source: Covip 21

22 3. The 2 nd Pillar after the reform of 2007 The 2007 automatic 2 pillar enrolment reform: most employees decided to opt out 12,000,000 10,000,000 8,000,000 Without Pension Plan 82.5% Opt - Out Without Pension Plan 73% Without Pension Plan 71.5% Without Pension Plan 70.5% 6,000,000 4,000,000 2,000,000 0 With Pension Plan 17.5% Opt - In Automatic Enrolment 6% With Pension Plan 16.5% Automatic Enrolment Automatic Enrolment 21% With 20% Pension Plan 28.5% With Pension Plan 28.5% Dec-06 New Members in Dec-07 New Members in Dec-08 New Members in Dec Source: Covip Automatic enrloment as a percentage of new members 22

23 3. The 2 nd Pillar after the reform of 2007 Participation Rates ( ) 35% 30% 25% 20% 15% 10% 5% Company dimension 25% Age distribution 20% 15% 10% 5% 0% % small medium large < Source: Covip 23

24 3. The 2 nd Pillar after the reform of 2007 Low membership rates between employees in 2007 (Reform year) expecially in small size firms which are the backbone of Italy s economy 31/12/ /12/2007 Potential Membership Potential Membership Member Member rate Member Member rate Small firms (<50 units) ,1% ,5% Medium firms ( units) ,9% ,4% Big firms (>=250 units) ,0% ,4% Source: Congress FT Global Events TFR come tardiva e fallimentare riforma - Milan 2008 Estimates, Assogestioni on Covip and ISTAT data Membership rates in 2009 are still quite low. According to Covip reports the total membership rate is about 22%. Source: Covip 24

25 3. The 2 nd Pillar after the reform of 2007 Complex rules and the need of/search for information No Information Tv, radio, papers Trade Unions Employers Collegues Other Source: Boeri in Congress FT Global Events TFR come tardiva e fallimentare riforma - Milan

26 3. The 2 nd Pillar after the reform of 2007 Returns and TFR as a natural benchmark Contractuals 2nd Pillar returns Open Private Schemes Comparison with TFR Source: Covip TFR return 26