Systemic reforms just a utopian dream

Experts and analysts believe the idea of a systemic reform of France’s pension industry faces major hurdles and that it is unlikely to be implemented due to funding and political wrangling. They also say that building up a new pension regime from scratch would be the best way to simplify the French system and avoid increasing the deficit.

Back in 2003 and 2010, the government launched two parametric reforms that aimed to extend contributions, as well as increase the legal retirement age from 60 to 62 years. The measures have been criticised by pension consultants, officials representating the public system and social partners in charge of managing private schemes. They argue that these changes will be insufficient to absorb the deficit, contrary to the government’s claims. Several experts also say the government has based its plans to cut the deficit on a “generous” annual growth rate of 2% in the coming years, not to mention a “relatively low” unemployment rate.

Stéphane Hamayon, director of economic studies at French consultancy Harvest, said: “The estimation of the deficit was based on an unemployment rate of 4.5%. That clearly does not match the reality. For many years, unemployment in France has been around 8% and even above. The idea expressed by the government that the deficit will be totally absorbed by 2018 is thus totally unrealistic. New measures will have to be implemented in the future.”

A new committee has been created precisely for this aim. The Comité de Pilotage des Régimes de Retraite (COPILOR), which complements the Conseil d’Orientation des Retraites (COR) and is supervised by the ministry for social affairs, will be in charge of analysing the evolution of the parametric reform over the next few years. If the adopted measures fail to reduce the deficit, the committee will then make new propositions to implement more drastic changes. One of them could be the introduction of systemic pension reforms.

In October last year, an amendment was filed regarding the launch of a debate around the introduction of such reforms. This discussion could start as soon 2013. But as several pension representatives in France have noted, this could “never happen”, as the debate has been cautiously pushed back after the presidential elections scheduled for 2012. One official said: “Depending on the next government, the very idea of talking about a systemic reform could sink into oblivion.”

However, many agree this new system would bring three main benefits. First, it would unify the pension system, which is currently split into several schemes according to the professional category to which each worker belongs. Second, under the systemic reform, the annuity system - currently used in the first pillar only - would come to an end, and calculation on pensions would be based on pension points, as is already the case in the private system. Third, the demographic question and its consequences on pensions would be put at the heart of the new system, and measures would be introduced accordingly.

Clearly, the idea of a systemic reform results from a lack of clarity in the current system and from a colossal deficit. Before the last parametric reform was implemented in 2010, a report published by the COR showed that, in the best-case scenario, the deficit of the public pension system could reach as much as €40bn by 2020 without any measures taken. In the worst-case scenario, however, this deficit could jump to €50bn by that same date.

Pension fund officials and consultants have argued that the deficit, in addition to the lack of reserves, is the main barriers to systemic reforms. One pension scheme said: “France would like to generalise the pension points system, as it is easier to manage and would then follow the reform introduced in Sweden. But the government fails to understand that Sweden’s pension system is built around reserves, something France does not have. Without a reserve fund, it makes every systemic reforms difficult. The idea of such a reform is pure utopia.”

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