It’s sad to have to admit it, but every now and then the State has to act as a father to its citizens, take them by the hand and force them to do something in their own interest. For example, force them to invest money in supplementary funds so as not to find themselves poor and angry at the end of their careers with a public pension much lower than their salary. With the current system, anyone who stops working from 2040 onwards with at least 40 years of contributions risks receiving around 60 percent of their final salary from INPS. Not much. But with the debt we have, increasing social security spending is impossible: indeed, as soon as they can, governments cut current pensioners’ checks by reducing the adjustment to inflation and thus saving billions.
So how can we support the standard of living of future old people? By growing the second pillar, i.e. the supplementary pension, which costs the State nothing and also diverts resources towards the real economy. For this reason, the Minister of Labor Marina Calderone is working on the hypothesis of introducing a semester of silent consent in 2025, during which the severance pay (TFR, the old severance pay) accrued during the period is automatically transferred to supplementary pension funds, unless the worker explicitly declares that he wants to keep the severance pay in the company. There has also been speculation about making the transfer of part of employees’ severance pay to pension funds mandatory, with some doubts about its constitutionality. It’s okay to be paternalistic, but let’s not overdo it…
What are pension funds
So we’re back to talking about pension funds. What are they? They are financial instruments that allow you to build capital over time from which to obtain an income that will supplement your future pension. In Italy there are four types: negotiated pension funds, created within the context of collective bargaining (national or company), which offer a series of exclusive advantages; then there are the products intended mainly for self-employed workers, such as open pension funds made up of banks, insurance companies, savings management companies and securities brokerage companies; or individual pension plans (PIPs), established by insurance companies; finally there are pre-existing pension funds, created by banks and large companies before the 1993 legislative decree which introduced organic regulation of the sector for the first time. Between funds and PIPs, there are 302 products in Italy which have 9.6 million members and manage over 224 billion euros, 10.8 percent of GDP. In particular, the trading funds we are dealing with in this article are 33 with 3.9 million members. Among the largest are those of metalworkers, which is called Cometa, that of chemists, Fonchim, that of construction workers, Prevedi. But 3.9 million members are still few out of a total of around 18 million employees.
How they work and who controls them
Occupational pension funds entrust the management of investments to authorized intermediaries such as banks or insurance companies. The worker who decides to transfer part of his salary or severance pay into the sector fund can choose between several sectors: from conservative ones which offer a minimum return guarantee, to balanced ones, which invest in shares and bonds, up to equity ones which invest mainly in actions. Their activity is under the control of Covip, the Pension Fund Supervisory Commission, operational since 1996. The funds are safe: in their history there have been no failures nor have they been at the center of scandals.
The advantages
Allocating part of your salary to occupational pension funds has undoubted advantages. The most obvious is that a small portion of the gross salary is invested: in other words, if I give up 100 euros net, I am paying the corresponding portion of the gross salary into the fund, around 150 euros. Up to the sum of 5,164.57 euros per year, the contributions paid to the complementary pension are deducted from the taxable amount, therefore they are subtracted from the ordinary Irpef taxation applied on the pay slip. Furthermore, if provided for in the employment contract, the employer also pays a small contribution, which can vary from 1 to 3 percent of the member’s gross salary. All with disarming simplicity: the company takes care of everything and the worker just has to sign and join the sector he has chosen. However, if the employee decides to allocate part or all of the severance pay to supplementary pension provision, there is no contribution from the employer. Furthermore, members who move to another company or another sector can continue to pay into their fund or change it, just as they can do so even if they keep the same job. And then the commissions foreseen by trading funds are much lower than to open funds or insurance products: over a ten-year time horizon, the summary cost indicator (Isc) is equal to 0.5 percent for occupational funds, 1.35 for open pension funds, and of 2.17 percent for Pips.
Competition with severance pay
Yet supplementary pension provision has not taken off. There are many reasons: low salaries, generous public pensions, poor financial culture, excessive taxation (rising to 20 percent on financial results against the initial 11 percent). And then there is the presence of severance pay. Liquidation, an instrument not very common abroad, allows the worker to accumulate capital (one month’s salary per year) without almost realizing it. And the TFR revaluation mechanism is interesting, a fixed 1.5 percent plus 75 percent of inflation: with a low cost of living level, currently less than 2 percent, it is particularly advantageous. Why give up this little treasure and switch to pension funds? However, it must be kept in mind that if you change jobs often, the severance pay is collected several times and it is likely that by the time you retire it will have been significantly reduced.
They yield more but it takes patience
A young person who starts working should have the courage to allocate part of their salary or severance pay in an equity segment: in 2023 the equity lines earned an average of 10.2 percent and from the beginning of 2014 to the first six months of 2024 they made around 4.5-5 percent per year. Instead, the balanced lines yielded between 2 and 3 percent and the guaranteed and bond lines less than 1 percent. Therefore, to beat the severance pay, which has grown by 2.4 percent per year over the decade, and create more substantial capital, it is better to focus on the aggressive and riskier sectors. However, with the foresight of changing horses when you approach retirement age, moving your investments into bond sectors so as not to find yourself in the midst of a financial crisis just when you can collect your income or capital. Fortunately, it is possible to delay this option: the fund continues to manage the accumulated capital while waiting for the markets to recover. But it takes patience. However, the choice of an equity fund is not widespread, around half of the members have allocated their contributions to investment lines with a zero or marginal equity quota.
Capital or income
Upon reaching the requirements for the compulsory pension, the worker enrolled in a fund can choose to transform his individual position into an annuity, thus receiving a supplementary pension for life; or obtain up to a maximum of 50 percent of the capital accumulated in a single solution and the remainder as an annuity (but watch out for taxes: the rate on capital ranges from 15 to 9 percent depending on the length of time in the fund and whether are enrolled in an old fund that allows you to withdraw the entire capital, the rate easily breaks 30). Generally, Italians want capital, defeating the purpose of supplementary pension provision, i.e. adding a little money to the INPS check. But when the 67-year-old member is faced with the possibility of immediately collecting 100 thousand euros or having a gross annual income of 7 thousand euros, the temptation to take everything is strong.
