Employment Update, Italy - February 2007

13 February 2007

Carlo Quaranta, Caterina De Mattia

Enactment of new rules related to Private Pension Funds

With effect from 1 January 2007, the Italian Government has implemented new rules relating to Private Pension Funds and TFR (a lump-sum termination payment paid by employers).

Private Pension Funds have not been commonplace in Italy due to State Pensions offering almost 80% of final salary. However, due to a series of legislative amendments, the level of State Pension being provided has steadily decreased. As a result of this, the Italian Government has decided to actively support Private Pension Funds by inducing employees to pay a proportion of their prospective TFR’s into such Funds.

This Governmental decision has proved very unpopular with employers because the accrued TFR (which shows as a liability in a company’s balance sheet) was used as a low-rate, self-financing mechanism. Following strong opposition from employers, smaller companies are now exempt from some of the new TFR rules.

The situation in Italy will now be as follows:

The existing Mandatory National Pension Scheme will continue to ensure a base pension-quota and be supplied by existing national security pension funds (INPS, INDAP and the mandatory pension schemes providing for certain professions such as doctors and lawyers). However, as well as this existing scheme, an additional pension scheme with specific tax benefits will be introduced and actively encouraged by both the Government and employers.

According to this new system, all employees have the choice to:

  1. assign their future TFR to a supplementary private fund; or

  2. keep the TFR in the company and have it paid, as before, at the end of their employment relationship.

In this second case, and in respect of companies with over 50 employees, prospective TFR will automatically be transferred into a new, specific fund managed by INPS and used by the Government as a temporary loan.

In the absence of an express decision by the employee, the newly accrued TFR will be paid into pension funds which are either:

1. provided by collective bargaining agreements; or
2. chosen by the majority of employees.

In the absence of these alternatives, the newly accrued TFR will be paid into a new INPS pension fund, which will, in the future (and according to rules still to be enacted) pay an additional pension quota.

Employees who were registered with the Mandatory National Pension scheme before 29 April 1993 and who had already chosen a supplementary pension fund are entitled to assign their TFR to the supplementary pension fund.

There is a positive obligation on employers to inform all their employees about the recent changes and the options available to them.

Existing employees must make their choice of Fund by 30 June 2007. New employees have six months from the date of employment to register their choice.