Remember the debate about the destination of the TFR, the Severance indemnity of employees? The question arose for the first time in January 2007, when, with the entry into force of legislative decree 252/2005, workers were faced with the choice of whether to leave the severance pay in the company or invest it in a negotiated pension fund (the so-called second pillar of Italian social security).
Things got even more complicated when the 2015 Finance Law introduced, on an experimental basis until 30 June 2018, the possibility of requesting the monthly disbursement of the severance indemnity in payroll, subjecting it to ordinary taxation. But this is another matter, which we will address elsewhere. For now, let's focus on the choice between the company and the negotiated pension fund.
10 years after the decree came into force, what was the best choice?
The simulation
The numbers speak for themselves. The sun 24 hours, thanks to the data provided by the territorial pension fund Veneto solidarity, has created a simulation by analyzing the portfolio of an investor who 10 years ago decided to join a negotiated fund, comparing it with the gain that the same investor would have made by deciding instead to leave the TFR in the company.
Well, our investor finds himself today with a much richer portfolio than he would have obtained if he had relied only on the revaluation of the severance pay. Naturally, the yield obtained varies according to the sector chosen within the negotiated fund: it ranges from the riskiest (dynamic) to the most prudent (in the case of Solidarietà Veneto it is called "TFR Garantito" and aims to achieve returns equal to or higher than the revaluation rate of the severance indemnity guaranteeing the return of the invested capital and a net three-year return at least equal to the net revaluation of the severance indemnity in the company).
We remind you that not only severance indemnity contributes to pension fund positions, but also the voluntary contribution of the worker and the consequent contribution of the employer, which is required to pay - on the basis of collective agreements - only if the worker actually opts for the payment of a voluntary contribution.
Below is the simulation, calculated assuming an accrued severance indemnity equal to 19 thousand euros, which serves as starting capital. The data refer to the return on capital accrued in the period 2007-end 2016.
Comparison of advantages and disadvantages
In fact, with data in hand, contractual funds appear to be a more advantageous choice than leaving the severance pay accruing in the company. Let's analyze the pros and cons of each choice (source: “The Re-Evolution of Pensions”, State Street Global Advisors):
Supplementary pension funds
The pros
- Assets are kept separate from the employer;
- opportunity to participate in rising markets, therefore possible increase in savings beyond the fixed severance indemnity formula (+3,3% vs. +2,2% pa in the last 10 years);
- personal contributions are deductible up to a maximum amount of €5.165,57 each year;
- at a fiscal level, pension benefits are subject to a withholding tax equal to 15%, with a reduction of 0,3% for each year of participation after the 15th (with a minimum of 9%);
- greater investment opportunities;
- benefits due to asset diversification;
- members decide the amount of their contribution and the timing of payments;
- cheaper than other savings instruments (such as UCITS funds) having costs more similar to those of an institutional product than those of a retail product.
The cons
- The proceeds may increase or decrease, depending on the trend of the markets;
- the proceeds depend mainly on the level of contributions and the returns on the investment;
- members can access their pension savings before retirement only in limited cases and provided for by law.
The TFR in the company
The pros
- Guaranteed benefits: 1,5% annual growth rate + 75% inflation rate.
The cons
- The growth rate is lower than the potential returns on investments;
- workers cannot make additional contributions.
Negotiated funds, these strangers
Yet, according to the data provided by COVIP (the Supervisory Commission on Pension Funds), membership of negotiated funds is still not a widespread practice in Italy: to date, these instruments have in fact around 2,8 million members.
The Italians snub the negotiating funds
As Assofondipensione points out, adherence to the second pillar is more important than ever today: the recent reforms of public welfare (with the definitive transition to the contributory system), the aging of the population and the ever increasing labor market are all factors that have a negative on the public pension system. It is essential to run for cover.
So why do Italians tend not to invest in supplementary pension schemes? The answer now sounds like a refrain: essentially there is a lack of financial education. The umpteenth testimony comes from a research conducted in 2017 by IPSOS and Prometeia on 1.367 individuals aged between 18 and 74, with the aim of understanding the investment and protection needs of Italian families, the demand for savings products and their relationship with the world of finance.
A clear lack of knowledge about the benefits of supplementary pension funds emerged, especially among the youngest, with 75% of the under 35s believing they have limited or non-existent knowledge about pensions.
Moreover. When asked to justify the decision not to invest in supplementary pension funds, most of the interviewees cited the costs being too high. Yet this plea appears unfounded, given that the costs for supplementary pension funds are less than a quarter of those for mutual funds and other private pension products.
In short, these answers are another symptom of lack of knowledge.
What to do?
As always, the first step is awareness. To begin with, it is important for people to know the likely level of retirement they will have accrued at the end of their career, so that they are aware of the situation and can move accordingly by preparing with private savings.
Secondly, it would be good to find out in depth about the alternatives available: often, the decision to leave the TFR in the company is dictated by a mix of laziness and lack of knowledge of the alternative. As we always say, an informed saver is a better saver.
From the blog of Advise Only.
Forget it, no one will give you any guarantee on future returns unlike the severance pay in the company, a safe and guaranteed investment even in the event of company bankruptcy. Except that everyone wants to divide the pie on the shoulders of the workers. Don't bite
In my case, the employer, on the advice of the infamous accountant, ceased any type of payment due to the contractual fund to which its employees adhered ... now: the fund "suggests" me several times to speak with the employer, who more sometimes he gives me the supercazzola ... after 40 years and 15 of relationship with the same company, try to sue your owner, and see the repercussions in the workplace (if you keep it): two and a half years of money lost ... in this country lacks the protection of the figure-prince of the correct taxpayer: the employee. The only one who has always paid taxes to the last penny, and on a regular basis.