True reform means giving people freedom of choice: severance pay included in this month’s pay packet today, or tax-free in a fund tomorrow

The reform of severance pay has begun, but the most delicate stage is yet to come. From 1 July, new recruits in the private sector have been automatically enrolled in a supplementary pension scheme: within 60 days, employees may choose to retain their severance pay under the standard scheme or transfer it to a pension fund; if they do not make a choice, the severance pay will be channelled into the collective scheme specified in their employment contract.

At the end of October, however, the real change will come. Employees will also be able to transfer their employer’s contribution to another fund, including open-ended funds and individual products. The regulation breaks one of the main constraints that have hitherto protected occupational pension funds. Portability makes sense: it increases freedom of choice and can boost competition. But at the same time, it opens up a huge market. Estimates reported in the financial press suggest that 10–15 per cent of the assets managed by occupational pension funds could be transferred. As these funds manage almost €85 billion, this means that €8.5–13 billion in pension savings could become up for grabs.

Intermediaries’ earnings do not come solely from pension fund commissions. Research by C2Partners and Previon, reported by Il Sole 24 Ore, estimates that simply placing an open-ended fund or a PIP generates around 30 euros in annual revenue per position, whilst a pension advisory report used to sell advisory services, asset management and insurance policies can reach 450 euros: fifteen times as much. The same authors estimate that, for the banking and insurance sectors, the potential profitability of integrated pension advice amounts to around 19 billion per year, before costs. This is not an estimate of the revenue generated solely by the portability of severance pay, but it explains the interest shown by banks and insurance companies.

There is a risk of confusing two distinct issues. One is how to fund adequate pensions for young people. The other is who should manage their savings. Facilitating the transfer of severance pay (TFR) may increase competition, but it does not create new pension savings: it mainly changes the vehicle in which the funds are held. Severance pay (TFR) amounts to around 7 per cent of salary and is a compulsory form of deferred pay. Together with pension contributions of around 33 per cent, this brings the proportion of monthly pay that does not appear in the current payslip to around 40 per cent. For young Italians, this matters a great deal. All countries must be concerned about future pensions, but Italy also faces a particular problem: very low wages for young people today.

Germany is taking a different approach. It has proposed a compulsory public funded pension scheme, financed by new contributions of up to 2 per cent of earnings, split equally between the employee and the employer. Spain has also strengthened its pension funding: by 2026, the Intergenerational Equity Mechanism will amount to 0.9 per cent of earnings. However, both countries start from a base of pension contributions that are lower than ours. We, on the other hand, are taking a different approach: we are taking the existing compulsory savings scheme and attempting to transform it into a supplementary pension scheme. And it is not even certain that it will actually become a pension in the end. Capital, in fact, continues to play a very important role at retirement. The risk is that the traditional end-of-service severance payment will be replaced by an end-of-career severance payment, managed in the meantime for decades by the financial sector.

A more straightforward approach would be to clearly separate the two functions. For new recruits, severance pay should be able to become actual disposable income. Employees should be able to choose whether to receive that figure – almost 7 per cent of their salary – each month as part of their pay packet or to pay it into a supplementary pension scheme. In the latter case, the state could offer significant tax relief and collective bargaining agreements could provide for an additional contribution from the employer. Those who decide to allocate their severance pay to the fund should also receive greater incentives if they eventually convert the accumulated capital into an annuity, that is, into a genuine supplementary pension.

The issue is not about being against pension funds. They can be a useful tool. The point is that you cannot call a reform ‘pension reform’ if, above all, it merely decides who will manage savings that workers were already obliged to set aside.

If we want better pensions, we must develop pension schemes. If we want higher wages, we must recognise that severance pay is deferred pay. For young people, it would be more transparent to offer a genuine choice: severance pay in their pay packet today, or tax-free severance pay in a pension fund for the future. Automatically shifting it from one pot to another, on the other hand, risks primarily creating new business for those who will manage that money.