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Occupational pension schemes
Types of scheme
What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?
There are three main types of pension scheme in Italy that constitute the ‘second-pillar’ system, in contrast to the first pillar (ie, the National Security System):
- Contractual pension funds – these are independent legal entities set up through collective bargaining agreements (CBAs) between employers’ associations (or by each single employer) and trade unions. Membership is open only to employees that meet the conditions set out by the agreement (eg, employees in the metalworking and plant installation industry or employees in the bank sector).
- Open pension funds – these funds are promoted by companies in the financial sector (eg, banks, brokerage, savings management, investment fund management and insurers) as a specific, separate and autonomous asset. Open funds are not independent legal entities, but resources received by members that have special status, as they are legally separated from the entity which manages the fund and, as such, cannot be subject to enforced execution by the sponsor company’s creditors. Beneficiaries of these funds are not limited to a particular group of person or employees. Enrolment in these funds can be on an individual or collective basis.
- Old pension funds – these are private voluntary retirement funds which were already in operation when Decree 124/1993 (ie, the first law which set structured private pensions) entered into force. They are operational funds which are structured as defined contribution and benefit schemes.
In addition to pension funds, a 'third-pillar' system allows for individual pension schemes (PIPs), which are implemented through individual membership to an open pension fund or life insurance contract. PIP assets are separate and autonomous within the same company. The beneficiaries of these funds are not limited to a particular group of persons or employees – even if they are at the executive level. Further, these funds are open not only to employees, but to any natural person.
Is there a statutory framework governing the establishment and operation of occupational pension plans?
The private pension schemes under the second and third pillars are regulated by the Supplementary Pensions Act (Law 252 of December 5 2005).
The Supplementary Pensions Act sets out:
- the pension funds requirements;
- the financing rules;
- tax privileges;
- pension benefits (defined benefit schemes and defined contribution);
- protections for early leavers;
- the contribution due on supplementary contributions;
- the powers of the supervisory authority on supplementary pension schemes (COVIP); and
- the penalties if the fund disrupted.
In addition to the act, pension schemes are subject to the bylaws on pension funds and the regulations issued by COVIP (an independent administrative authority tasked with monitoring the functioning of the pension fund system). CBAs usually regulate the amount of contributions due from employers and employees (in contractual funds).
What are the general rules and requirements regarding the vesting of benefits?
Italian supplementary pension schemes are based on the principle of defined contributions, which means that the amount of pension benefits relates to employer and employee contributions and is increased by investment returns.
The Supplementary Pensions Act sets out the requirements and arrangements for accessing supplementary benefits. According to the act, once an individual has participated in a supplementary pension scheme for at least five years, he or she will have full rights to his or her pension benefits upon meeting the requirements set out in the National Security System for old-age pensions paid by the National Social Security Institute (INPS).
Once these requirements are met, employees can receive:
- a life annuity;
- pension benefits partly in the form of annuity and partly in the form of capital, up to a lump sum of 50% of the amount collected; or
- the entire amount as capital if the life annuity arrangement corresponds to 70% of the pension benefit and interest is less than 50% of the social pension.
In accordance with the Supplementary Pensions Act, employees can liquidate their entire pension if:
- they experience a permanent disability;
- they are no longer required to participate in contractual funds.
Specific rules are in place for those who retire early for health reasons and first-time house buyers and also for those who are unemployed for more than 24 months and that are less than five years (term that can be raised to 10 years from the bylaws of the funds) close to reach the requirements set out in the National Security System for old-age pensions paid by the National Social Security Institute
What are the general rules and requirements regarding the funding of plan liabilities?
Funding is based on the contributions made by the employer and employee, as well as annual severance pay (severance indemnity contributions).
Even if employees can access contractual funds, the Supplementary Pensions Act requires employees to decide within six months of their hire whether they want to use their severance indemnity contributions (that can be totally used or just in part, depending by what it is established in the CBA)in order to finance their pensions (in absence of a specific indication, the severance indemnity is fully devolved).
If employees opt to use their severance indemnity contributions, they cannot change their minds until their termination; employees are only entitled to modify the measure of their contributions respecting the minimum limit fixed by CBA. If there is a delay in providing an employee with an explicit option, these contributions will be put in the CBA-established fund used by the company or, if no such fund exists, into a ‘fondinps’ – a specific INPS-managed fund. Irrespective of any severance indemnity contributions, pension schemes are funded by contributions paid by the employer and employee. The contribution amount is established by the relevant CBA or by the fund’s bylaws. Supplementary contributions are always allowed.
What are the tax consequences for employers and participants of occupational pension schemes?
Employer contributions to private pension schemes are considered as employment income and subject to tax and social security contributions (a specific rate is applied). For tax purposes, employees can deduct contributions paid up to a limit of €5,164.57.
The Supplementary Pensions Act has introduced some compensatory measures in favour of companies – in particular, the right to deduct from the enterprise annual income an amount equal to 4% (6% for companies with fewer than 50 employees) of the value of the sums accrued as severance indemnity contributions for the purpose of financing complementary pension schemes. There is also an exemption from the payment of the contribution due to the guaranteed investment fund for severance indemnity contributions in the same percentage as the provision for supplementary pension forms.
Is there any requirement to hold plan assets in trust or similar vehicles?
Italian pension schemes are contractual. They consist of individual contracts between the fund (either contractual, either open) and members, where the fund is responsible for administering the pension scheme.
For the purpose of its operation, the pension fund identifies a financial manager who stipulates conventions focused on the management of the fund's assets. Contributions are invested in secure vehicles provided for by law and managed through:
- agreements with insurers or with asset management companies;
- subscription or acquisition of shares of real estate companies;
- units of closed-end mutual real estate funds; or
- the subscription and acquisition of shares in closed-end mutual funds.
The law requires that a depositary bank keeps the assets in custody and conducts trading activities following the instructions given by the financial manager in accordance with the provisions of law, bylaws and circulars issued by COVIP.
Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?
The pension funds’ members must be made aware of the level of the risk to which they are exposed. For this reason, financial managers must comply with the risks profile defined by the fund with an approach of prevention. Following the rules defined by COVIP, fund must provide their members with information regarding the investment choices and prepare a specific document on the objectives and criteria of their investment policy, including:
- the methods of measuring risk and their investment risk management techniques; and
- the strategic breakdown of assets in relation to nature and the length of the pension benefits due.
This document is reviewed every three years and made available to pensioners and beneficiaries of the pension fund.
It has also been ruled that in all cases of tacit transfer of an employee’s severance indemnity contributions to retirement funds, pension funds may invest sums received only in more prudent investment terms that offer returns and a return guarantee of comparable capital at the revaluation rate of the severance indemnity contributions.
Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?
COVIP controls the technical, financial, asset and accounting management of complementary pension schemes. If the scheme is underfunded because of financial problems qualified as serious, COVIP should evaluate possible solutions and measures, which will be determined by financial managers.
In the absence of adequate assets to pay retirement benefits, COVIP may limit the availability of assets.
Directive 80/987/EEC of October 20 1980, as amended by Directive 94/08 EC, protects employees in the event of insolvency of the employer.
In particular, if an employer becomes insolvent, the employees can ask the INPS to intervene using the guarantee fund. This fund protects employees when an insolvent employer fails to pay contributions to private pension schemes, or only pays a portion therein.
In particular, the fund ensures:
- the employer’s contribution;
- the employee’s contribution which the employer has failed to contribute; and
- the portion of severance indemnity contribution transferred to the fund which the employer has failed to pay.
In addition, the fund reassesses the contributions paid by using the performance indemnity index for each year.
The guarantee fund will pay the amount of contributions directly omitted to the supplementary pension scheme in which the contributory omission has occurred or where the employee has subsequently transferred. Therefore, there is no direct payment to employees.
In the event of dissolution of the fund, because of the insolvency of the subjects bound to the contributions, members who already receive a pension have insurance protection. Other members can instead liquidate the amount that they have accrued or transfer it to another supplementary pension scheme.
Are employees’ pension rights protected in the event of a business transfer?
If a business is sold or transferred to a new legal entity, existing employment relationships, together with all of the related rights and obligations, automatically transfer to the acquiring party, pursuant to Article 2112 of the Civil Code.
In these cases, if an employee who works in the transferred business is enrolled in a contractual fund and both the transferor and the transferee apply the same collective agreement, the transferee and the employee will continue to pay contributions. On the contrary, if the employers apply a different collective agreement – unless otherwise agreed with the relevant trade unions and unless the bylaws of the seller’s supplementary pension fund allow the maintenance of the status of partner – employees cannot participate in the previous pension scheme and must choose the one linked with the transferee or any other kind of supplementary scheme in order to continue financing their individual position.
If an employee is a member of an open fund, an individual pension plan or an old pension fund which he or she has accessed independently of any collective agreement, he or she will continue paying contributions to it.
Deferred compensation agreements
Deferred compensation plans
Do any special tax rules apply to these types of arrangement?
If the deferred remuneration is paid when the employment relationship is still in force, it is included in the current payroll. Tax and contribution are applied on both the ordinary salary and the deferred compensation which is paid during the same month. The lump sum can determine an increase of the overall annual tax rate.
If the amount is paid after the end of the employment relationship, the tax rule is favourable for the employee. In this case, the amount is taxed separately and with a lower rate. No contribution is due. The deferred compensation is not considered in the calculation of the ordinary annual incomes of the employee and the tax rate applicable on the latter incomes is not influenced by the payment of such a deferred remuneration.
Do these types of arrangement raise any special securities law issues?
As the deferred compensation is a part of the remuneration, no special securities laws apply.
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