Transferring severance pay to pension funds won’t save pensions; young people need it in their pay packets today

Federico Fubini deserves credit for writing in the "Corriere della Sera" about something that pension experts have known for some time, but which almost no one tells Italians. Around 400 billion in pension savings are entrusted to a fragmented, costly, poorly transparent system that is not always capable of generating adequate returns. It is very difficult to make any headway with this issue because it is deeply entrenched in politics.

The first case concerns the pension funds for the professions. They hold substantial assets, but are subject to less stringent governance and transparency rules than those imposed by Covip on pension funds. Yet they are, to all intents and purposes, public pensions. In some cases, bodies representing these professional groups manage billions and select advisers and fund managers on whom the pensions of entire professions will depend. There have already been instances where these assets have been steered by politicians towards investments favoured by the government, not necessarily chosen in the best interests of the members. For years, there has been a call for a regulatory framework capable of imposing professional standards, transparent procedures and controls on conflicts of interest. But it never materialises.

Pension funds are subject to greater oversight and are more transparent, but they face other problems. There are too many of them, and this fragmentation drives up costs, reduces the ability to monitor fund managers and prevents the realisation of economies of scale. Covip publishes returns and summary indicators showing just how significant the cost differences are and that not all funds manage to consistently outperform the revaluation of severance pay. Just a few decimal places less each year can reduce the final lump sum by a significant amount.

This discussion becomes even more important now that there are plans to automatically channel new recruits’ severance pay (TFR) into supplementary pension schemes. This will come into effect on 1 July 2026. If full portability of the employer’s contractual contribution – alongside that of the employee – is subsequently approved, it will open up a huge market for open-ended funds, insurance companies and banks. From their perspective, it would be the perfect business model: regular contribution flows for forty years. Competition may improve the offering, but it could also shift it away from collective funds – which are relatively less expensive – towards individual products with higher fees, backed by aggressive sales networks.

Allocating severance pay (TFR) to supplementary pension schemes is reasonable. Under the contribution-based system, state pensions will be less generous and a second pillar needs to be established. However, we must avoid two misconceptions. The first is that simply automatically channelling severance pay into these funds is enough to solve the problem of future pensions. When the generations who have paid contributions throughout their working lives reach retirement age (in less than ten years’ time), it will still be necessary to strengthen the public pension pillar: to adjust pensions that are too low, to protect those with interrupted careers, and to recognise periods of unemployment, care and training.

The second misconception is that every euro saved today is necessarily more useful than a euro received as part of one’s salary. For a young person, severance pay (TFR) is not merely a deferred pension: it is income taken away from the present. Severance pay exists only in Italy and reduces wages by 7.19 per cent compared with other countries. For this reason, it would be more consistent to genuinely liberalise the choice, allowing new recruits to allocate their severance pay to a pension fund – with a tax incentive – or to receive it as part of their pay packet.

Fabio Panetta, Governor of the Bank of Italy, highlighted just how significant the wage gap is for young Italians. A recent German graduate earns on average 80 per cent more than an Italian of the same age; a French graduate earns 30 per cent more. And these gaps have widened over time. The problem is not just the gap compared with other countries. The economic relationship between young people and adults has also deteriorated.

Given this situation, mandatorily withholding a further portion of one’s salary to hand it over to intermediaries who will manage it for forty years cannot be the only solution. First, we need to make pension funds and occupational pension schemes more transparent and prevent portability from turning into a commercial race towards expensive products. Above all, however, we must prevent young Italians from continuing to leave the country. Without them, the pension crisis will arrive long before the severance pay paid into a fund today can be converted into a pension. A pay-as-you-go pension system does not rely on future contributions, but on current workers. If skilled young people emigrate because their earnings are too low, the contributions that fund today’s pensions will immediately decline.