Italy - Major reform of the pension system enacted

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Italy - Major reform of the pension system enacted
Italy
Major reform of the pension system enacted
On 22 December 2011, the President
of the Italian Republic signed into
law, a decree previously issued by
Monti’s government. The new law has
introduced emergency austerity measures
that have modified the Italian state
pension system in several ways.
Before detailing the changes, it should be pointed out
that there is a number of exceptions to the scope of its
application, notably:
• The new reform does not apply to employees who
had met the pension eligibility requirements by
31 December 2011.
• In some specific cases, the previous legislation
continues to apply for those who fulfil the pension
eligibility requirements after 31 December 2011
(and only within the limits established in
article 24, paragraph 15 of the law). The main
category of employees covered by this exception
is employees made redundant (standard procedure
and long-term redundancies) on the basis of collective
agreements signed before 4 December 2011.
• Other exceptions to the reform relate to:
• Employees (men and women) who by
31 December 2012 have contributed for at
least 36 years and have attained 60 years of age,
or 35 years of contributions and 61 years of age.
This category of employees will be allowed to retire
at the age of 64.
• Female employees who by 31 December 2012
have contributed at least 20 years and, by the
same date, attained at least 60 years of age:
they may retire with the old-age pension at the
age of 64 years.
• A current experimental arrangement lasting until
31 December 2015, whereby female employees
and self-employed female workers with at least
35 years of contribution history and having attained
57 years of age (for female employees), or
58 years of age for self-employed females, may
claim the seniority pension from these ages,
provided they opt for payment of their state pension
benefit, calculated using the rules of the notional
defined contribution-based method.
The classification we use to analyse the changes
remains the standard one:
•• People in the earnings-related
system (‘retributivi’), those who, at
31 December 1995, had at least
18 years of contributions.
•• People in the pro-rata system (‘misti’), those
who had not reached, at 31 December 1995,
18 years of contributions.
•• People in the contribution-based system
(‘contributivi’), those hired for the first time
from 1 January 1996.
We analyse each category separately.
Earnings-related system
From 1 January 2012 those people move to the
pro-rata system (obviously only for the amount
accrued from 1 January 2012).
For those people, whilst remaining in the
earnings-related method of calculation
for the part of the pension accrued up to
31 December 2011, pension accrual from
1 January 2012 is going to be calculated using
the contribution-based system.
Regarding pension eligibility requirements,
however, the situation changes: there is still the
old-age pension that can be reached at a fixed
chronological age, which is accompanied by
an ‘early retirement pension’ (the old seniority
pension), but you can only reach this with a certain
number of years of seniority contributions, and not
with the simultaneous presence of this and a
certain chronological age (the old method of the
quotas – a combination of minimum age/years
of contribution).
Regarding the old-age pension, as from
1 January 2012:
•• Female employees will retire at the age of
62 years. This age will change as follows:
from 1 Jan 2013, 62 years and 3 months
from 1 Jan 2014, 63 years and 9 months
from 1 Jan 2016, 65 years and 3 months
from 1 Jan 2018, 66 years and 3 months.
•• Self-employed female workers will retire at the
age of 63 years and 6 months. This age will
change as follows:
from 1 Jan 2013, 63 years and 9 months
from 1 Jan 2014, 64 years and 9 months
from 1 Jan 2016, 65 years and 9 months
from 1 Jan 2018, 66 years and 3 months.
For all the other workers the retirement age
becomes 66 years starting from 1 January 2012,
increasing according to the actual increases in life
expectancy published by the National Institute of
Statistics (Istat).
2 Italy – major reform of the pension system enacted
With regard to the ‘early retirement pension’, as
mentioned above, there is the need to accrue a
certain number of years of seniority contribution
(the quotas will no longer exist). In particular, these
are the new requirements:
Men: 42 years and 1 month in 2012, 42 years
and 5 months in 2013, 42 years and 6 months
from 2014.
Women: 41 years and 1 month in 2012, 41 years
and 5 months in 2013, 41 years and 6 months
from 2014.
If you will have access to the ‘early retirement
pension’ (similar to former old-age pension)
before the age of 62, a reduction to the portion
of the total pension benefit related to the service
rendered up until 31 December 2011 will be
applied: the reduction percentage will be 1% for
each year before this date, or 2% for each year
before age 60.
Pro-rata system
As mentioned above, this category also
‘includes’, from 1 January 2012, those subject
to the earnings-relating system. Therefore, the
changes just described related to these employees
apply in the same way to those in the pro-rata
system. The difference, already introduced and
highlighted for clarity, is that, with regard to the
amount of the state pension benefit, for pro-rata
individuals the annuity is calculated using the
contribution-based method for all service rendered
from 1 January 1996; for the individuals belonging
to the former earnings-related system, the
contribution-based method applies to service
rendered from 1 January 2012 onwards.
Moreover, those on the pro-rata system, ‘early
retirement pension’ before the age of 62 will
lead to a reduction of 1% for each year before
this date, or a reduction of 2% for each year before
the age of 60.
Contribution-based system
The same notional defined contribution-based
calculation will continue to apply. If we look at
the eligibility requirements, the changes are
similar to those that took place for workers in the
pro-rata and earnings-related systems, although
the ordinary old-age pension (whose requirements
are identical to those analysed) requires the
amount of the first pension tranche to be equal,
in 2012, to 1.5 times the monthly amount of the
minimum social allowance. This threshold will be
indexed based on periodic Gross Domestic Product
(GDP) increases.
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With regard to this category of workers, access to
the ‘early retirement pension’ is permitted also on
the following conditions: age 63 and with at least
20 years of seniority contribution, and the first
pension tranche must be equal to a certain level:
in particular, in 2012, this must be 2.8 times the
monthly amount of the minimum social allowance.
For all three categories (earnings related,
contribution based, pro-rata), in accordance
with Law Number 122/2010, age and service
requirements will be periodically reviewed based
on the actual increases in life expectancy
published by Istat.
Moreover, pensions calculated under the notional
defined contribution system will be affected by
the application of periodically reviewed annuity
conversion factors.
Finally, as from 2021 no categories of workers will
be able to retire before the age of 67.
Analysing the reform, we can anticipate several
effects it will produce in the coming years:
•• Firstly, for all companies that draw up their
financial statements using International
Accounting Standards (IAS) and United States
General Accepted Accounting Principles
(US GAAP), the overall increase in retirement
ages will lead to an increase in the seniority of
the employees, with some implications for their
most common defined benefit arrangements
(such as Long Service Awards, Tratamento Fine
Rapporto (TFR) and other severance payment
schemes). In particular, with regard to the
TFR and similar allowances, there will be a
reduction in the Defined Benefits Obligation
(DBO) of broadly 1% to 5% depending on plan
membership demographics as well as on
actuarial assumptions. For jubilee plans, seniority
bonuses and other similar long-term benefits,
we expect an increase of DBO whose measure
cannot be quantified in advance because this is
variable depending on the plan’s rules and the
membership valued.
•• Secondly, the new reform clears mutuality in
the amount of the state pension benefit that
characterised part of the previous pension
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system, that is the earnings-related system.
This is a result of two interventions: the
elimination of the scale of returns on pensions
and the elimination of the limit of 40 years of
contributions to use in pension calculation.
•• For people with a high level of income, the impact
of the reform will therefore be positive because
the rate of return to be used in the calculation
will not be decreasing whilst the income rises (as
it was for the calculation with the earnings-related
system), but will remain flat. The elimination of
the cap of 40 years of contribution used in the
calculation of retirement will allow people with
a long ‘working life’ to allow for the full service
history (including years in excess of the 40-year
cap) in the pension benefit calculation.
•• Last but not least, with the increase in the age of
retirement, the value of the pension, at a same
chronological age, will be lower than it would have
been under the previous system. This is due
in particular to amendments in the conversion
factors which reflect changes in ‘life expectancy’.
This means that with the transition to the new
legislation, the pension will be lower. In addition,
pension indexation will no longer be sufficient
to cover the actual increase in prices, therefore
leading to a lower real value of public pensions.
So in this context, supplementary pensions
become more important in order to maintain the
purchasing power during retirement.
Further information
For further information, please contact your
Towers Watson consultant, or
Ivan Saverio Abbruzzo (Milan)
+39 02 6378 0165
[email protected]
Alessandro Mencarini (Milan)
+39 02 6378 0115
[email protected]
Andrea Scaffidi (Rome)
+39 06 367 36303
[email protected]
Italy – major reform of the pension system enacted 3
Pension right
Figure 01. Summary of main changes
Earnings related
Pro-rata
Contribution based
Old age pension
Old age pension
Old age pension
Female employees
2012: 62 years
2013: 62 years 3 months
2014: 63 years 9 months
2016: 65 years 3 months*
2018: 66 years 3 months*
Female employees
2012: 62 years
2013: 62 years 3 months
2014: 63 years 9 months
2016: 65 years 3 months*
2018: 66 years 3 months*
Female employees
2012: 62 years
2013: 62 years 3 months
2014: 63 years 9 months
2016: 65 years 3 months*
2018: 66 years 3 months*
Self-employed female workers
2012: 63 years 6 months
2013: 63 years 9 months
2014: 64 years 9 months
2016: 65 years 9 months*
2018: 66 years 3 months*
Self-employed female workers
2012: 63 years 6 months
2013: 63 years 9 months
2014: 64 years 9 months
2016: 65 years 9 months*
2018: 66 years 3 months*
Self-employed female workers
2012: 63 years 6 months
2013: 63 years 9 months
2014: 64 years 9 months
2016: 65 years 9 months*
2018: 66 years 3 months*
Other workers
As from 2012: 66 years
Other workers
As from 2012: 66 years
Other workers
As from 2012: 66 years
Early retirement
Early retirement
Early retirement
Male employees
2012: 42 years 1 months
2013: 42 years 5 months
2014: 42 years 6 months
2016: 42 years 6 months*
Male employees
2012: 42 years 1 months
2013: 42 years 5 months
2014: 42 years 6 months
2016: 42 years 6 months*
Male employees
2012: 42 years 1 months
2013: 42 years 5 months
2014: 42 years 6 months
2016: 42 years 6 months*
Female employees
2012: 41 years 1 months
2013: 41 years 5 months
2014: 41 years 6 months
2016: 41 years 6 months*
Female employees
2012: 41 years 1 months
2013: 41 years 5 months
2014: 41 years 6 months
2016: 41 years 6 months*
Female employees
2012: 41 years 1 months
2013: 41 years 5 months
2014: 41 years 6 months
2016: 41 years 6 months*
Chronological requirement: 63 years of
age, 20 years of seniority contribution;
first pension tranche must be equal to
a certain level: for 2012, 2.8 times the
monthly amount of minimum allowance.
Calculation method
* Will be subject to review based on actual increases in life expectancy to be published by the National Institute of Statistics (Istat)
•• Calculation method: Earnings related
•• Calculation method: Earnings related
•• Calculation method: Contribution based.
up to 31/12/2011 and Contribution
up to 31/12/1995 and Contribution
based as from 01/01/2012.
based as from 01/01/1996.
•• If you will have access to the ‘early
•• If you will have access to the ‘early
retirement pension’ before the age of
retirement pension’ before the age of 62
62 years, a reduction in the amount
years, a reduction in the amount of 1%
of 1% for each year in advance of this
for each year in advance of this date, or a
date, or a reduction of 2% for each year
reduction of 2% for each year in advance
in advance of 60 years of age,
of 60 years of age, will be applied.
will be applied.
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TW-EU-2012-25206. May 2012.
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