ROME - The pension agreement reached between the Italian government and leading unions could produce a private pension system that accumulates 20 trillion lira to 30 trillion a year lira ($12.2 billion to $18.3 billion).
The problem is, that isn't enough to cover Italian employees properly - particularly senior management, pension experts warned.
Nor are proposed cuts in the state pension system tough enough, leading observers to believe the government will be forced to revisit the issue in a few years' time.
While Prime Minister Lamberto Dini originally sought to save 15 trillion lira from pension cuts over the next three years, Giancarlo Frigoli, chief economist at brokerage IMI Sigeco SIM, Milan, estimates the agreement will fall short by 4 trillion lira. Mr. Dini emphasized the agreement would produce an annual savings of 10 trillion lira during the next 10 years.
Confindustria, the Italian employers' association, refused to sign the agreement, fearing employers will be forced to make higher contributions.
But Confindustria's opposition is not likely to stop the agreement from being passed by Parliament by the end of June. The Parliament's center-left coalition puts unions in a dominant position politically.
Still, analysts believe the agreement represents an important first step in reforming Italy's extremely expensive state pension system, and could provide an important new source of capital for the nation. The Italian stock market rose 2.2% the week the deal was announced.
The government estimates private pension funds will amass 224 trillion lira ($136.6 billion) by 2010, based on a 35% participation rate.
Key reforms to the state pension system include:
The proposal would complete a shift to a system based on contributions during individuals' entire working lives from one based on final pay. (The shift was started by a 1992 law.) At retirement, pensions will be revalued by nominal gross domestic product; benefits will be adjusted for inflation annually.
The new system will be phased in. Workers with more than 18 years of contributions by the end of this year will remain under the existing system. New entrants would be calculated under the new system, while those with up to 18 years of participation will be covered by a combination of the two.
Early retirements will be cut back. The minimal retirement age would be set at 52, rising to 57 by 2006. But those retiring before age 62 would receive reduced benefits, while those retiring later, up to age 65, would receive higher benefits.
Significantly, the agreement virtually would eliminate "seniority pensions," which enable workers to retire at any age if they have worked at least 35 years, fewer for civil servants. This benefit has been particularly helpful for Italians working from their early teens. The proposal would stretch the minimum working period to 40 years by 2008, cutting these benefits greatly.
Unemployment benefits and disabled benefits would be switched to a separate fund, paid by the state.
State pension contributions from employers and employees would rise to a combined 33% of gross salary from 27%. But taxes actually wouldn't increase, as different benefits are reconciled.
Overall, the proposed changes should reduce state pensions to roughly 60% to 65% of pre-retirement income from a high of 80%, said Attilo Pellero, principal, William M. Mercer Srl, Milan.
Still, for a system that last year ran a deficit of 73 trillion lira, or 4.4% of GDP, the cuts are "a step in the right direction," according to an analysis by Salomon Brothers Inc.
Pension experts are less sanguine about the proposed new private pension system.
The main problem is employers and employees each could make tax-deductible contributions of only 2% of pay. Worse, contributions would be capped at 2.5 million lira ($1,525) each.
Employers would have to match their pension contribution with a transfer of at least an equivalent amount from the book-reserved severance pay system; the transfer could go as high as 7% of pay. In practice, experts think employers will merely match the pension contribution.
The low contribution limits, taken together with the move away from a final-pay system and elimination of other tax-favored savings, means company managers could receive substantially reduced pensions, experts said.
The agreement "indicates that in Italy the government doesn't care about the managers," said Piero Marchettini, managing director of Watson Wyatt Italy, Milan.
Plus, it will take a number of years before new private plans are put in place. Unions are expected to press to include such provisions in collective bargaining contracts, which are negotiated every three years.
Retail banks are expected to be the main winners of money management business, given their local presence. Italy is dominated by small and midsized companies; there are a relative handful with more than 100 employees, Mr. Marchettini said.
But insurance companies and money managers are expected to bid for the business, although there appears to be a question whether funds will be permitted to invest in mutual fund shares, Mr. Pellero said.
Another question is whether insurance companies will push for a requirement that pension investments receive a minimum return. Now, only insurance companies are allowed to sell guaranteed return products in Italy, Mr. Marchettini said.