1. The sluggish growth of pension funds: can the TFR help? Tito Boeri and Agar Brugiavini 3th April 2003

2. Fonte: Elaborazioni su dati COVIP

3. The “TFR shortcut” The “Trattamento di Fine Rapporto (TFR)” is a peculiar provision of the Italian system. It is technically a Severance Pay Fund, with no actual accumulation of reserves and is recorded as a book- keeping liability by firms. TFR is about 5% of total assets Workers contribute for 6.91% of their gross salary

4. Fonte: EFRP

11. However, right now, it serves other objectives: For employers: it is a source of financing (book- keeping liability). By assuming a borrowing rate of 5%, we estimate that for firms giving up this source of financing the cost of borrowing on the market could be as high as 650 millions euro per year. For employees, it represents a safety/insurance provision, it is fairly liquid (one can borrow a limited amount to cover medical expenses or to use as a downpayment). But it is most frequently taken by employees as a one-off payment at the time of retirement.

12. Setting the right incentives For employees Pension Funds should provide returns higher than the TFR (1.5+0.75 * inflation) even when inflation is low guarantees and liquidity should be as enjoyed with TFR provision For employers fiscal advantages or compensation for the loss incurred

13. The Fiscal Treatment: TFR versus Pension Funds TFR: a pure EET Contribution is paid out of gross wage. There is no taxation of returns (fixed by law) and there are strong privileges on the TFR payment (separate income tax at a reduced tax rate). Pension Funds (PF): de facto ETT However, even contributions to a PF are not fully exempt: these are deductible up to a max of 5.000 Euros (hardly binding for most employees). Returns are taxed at 11%; the pension emerging from the PF and (if chosen by the retiree) the lump- sum are taxed in a rather complex fashion. The lump sum is more heavily taxed, while the annuity payment are taxed only for the part that did not attract tax while accruing.

14. Guarantees TFR: strong (guarantee fund at INPS against firm bankruptcy) Pension Funds: quite weak (even if COVIP foster the subscribing of contracts with SIM that include clause as reimbursement for subscribers and, in some cases, a minimum earnings)

16. Open Issues Could the mechanism of the “default option” encourage the transfer from TFR to PF? (on at least for its association) Could an EET model help making PF more attractive? Could we introduce further protection for workers joining PF through a system of guarantees? Do we need further changes to the first pillar? Contracting-out? Extending the Dini pro-rata model to the generations of senior workers?

18. TFR:could it be the missing pillar? Potentially yes: Flow: about 13 billion euro (1.5% GDP) Stock: about 125 billion euro (14% GDP)