Capitalising on progress

France’s system of universal
retirement provision dates back
to the years immediately following
the second world war. The
role of the compulsory pay-as-you go
(répartition) element has long
been significant and is in line with
the strong Gallic preference for the
social model.
This preference dates back even
further – to the years before the first
world war, when a system of funded
pension provision was introduced
for certain sectors. However
France’s first experience of ‘la capitalisation’
(funded retirement) as a
means to provide for retirement
ended in disaster when the system
went bankrupt in the 1930s.
Hence the sensitivity of the French
to the term ‘pension fund’. While
the term ‘fonds de pension’ is understood
by France’s pensions industry,
it remains unofficial; France’s official
side - and its influence in the EU
- has resulted in the coining of the
term ‘institute of retirement provision’
French civil servants are covered by
a pay-as-you-go system known as
Préfonds. Traditionally their retirement
scheme has been superior to
that of private sector employees
although it is now being gradually
aligned thanks to legislation passed
in 2003. Previous attempts had succeeded
only in bringing almost the
entire French civil service on to the
streets, but a change in the economic
climate brought employers
and employees to an agreement.
Private sector employees are covered
by a compulsory pay-as-you-go
regime which is divided into four
tranches covering the different
bands of annual earnings. The basic
social security covers the tranche of
earnings up to the social security
ceiling (SSC) which is set currently
at around €30,000.
On account of the worsening
demographic balance the Fillon Law
of 2003 extended the length of time
required to accumulate a full pension
from 40 to 41 years. Employees
that contribute for 41 years will get
a pension of around 50% the average
of their 25 best earning years.
At the time of its introduction in
1946 the basic social security system
excluded management workers so
management functions quickly
introduced their own scheme a year
later in 1947. This is known as
AGIRC, the general association of
institutions for white collar retirement
provision. Today the social
security covers all professions up to
the SSC.
There are two AGIRC schemes:
one covers the second band of earnings
from €30,000 to €120,000; the
second covers the third band from
€120,000 to €240,000. The
increase in the number of years of
contributions required for a full
pension from the social security system
has delayed the age of retirement
allowed under the AGIRC system.
Another similarity which AGIRC
shares with the social security system
is that it is also based on the average
career of earnings. “If the manager
experiences a rapid increase in earnings
his replacement ratio will not be
very high – up to 60% but as low as
40%,” says Denis Campana, director
of retirement benefits at Mercer in
The first AGIRC scheme requires a
contribution that is 25% greater
than the amount that is invested in
the retirement account in order to
balance the deficit which the system
faces at present.
The second AGIRC scheme was
originally a separate scheme set up
for company directors but was
absorbed into the general AGIRC
system in the 1990s. It retains a
small anomalous difference in that
while the first scheme allows retirement
from the age of 60 if the full
quota of contributions has been
made in line with the basic social
security system, the second scheme
stipulates a retirement age of 65
even if the full quota of contributions
has been reached before that
Contributions are tax deductible
up to a maximum of 8% of salary. In
the past this was limited to annual
earnings of €150,000 but the Fillon
Law increased the limit to
Because of the relatively low level of
salary replacement offered by the
social security system, ARRCO - the
association of complementary retirement
schemes - was introduced in
1961 to provide additional pension
provision to cover the salaries of all
classes of employee up to €30,000.
Here too the length of time required
to accumulate a full pension is has
been increased to 41 years.
Together the social security and
ARRCO provide a replacement
ratio of 60-70%. “So the need for
any additional provision for those
earning up to the SSC is not very
great,” says Campana.
But he adds: “The relatively low
replacement ratio offered by the
AGIRC system, especially in cases of
rapid salary progression, means that
additional forms of pension provision
are needed.”
Many companies use the defined
contribution (DC) model to provide
additional pension benefits to
their management, while the
defined benefit (DB) system is the
form chosen for those in the fourth
band with salaries exceeding the
AGIRC system’s limit of €240,000.
DC schemes also benefit from the
extension to the tax break on contributions.
“There will be a move to
DC pension plans by those earning
between €150,000 and €240,000,”
says Campana. “In fact the move is
already taking place and is coming at
the expense of DB schemes.”
In spite of France’s strong social
traditions, all levels of French
society have realised that the payas-
you-go system cannot cover all,
or even most of the retirement needs
of all its retirees for ever. Jacqueline
Massieux, retirement and benefits
consultant at Hewitt’s Paris office
cites the official figures from the
Natonial Retirement Committee
that the total system may be in
deficit to the tune of €43bn a year by
2020, and by 2040 this figure may
be as high as €100bn.
“Furthermore the level of pension
benefit will decrease gradually over
time, while the number of years
required for the full pension may
increase to 43 or even to 44 years,” she
says. “Part of the problem is France’s
enduring unemployment rate at
around 10% which clearly has a significant
bearing on the system’s receipts.”
The government responded with a
new system of company retirement
savings where contributions would
be held until retirement. There is an
individual plan which can be purchased
from a bank or insurance
company as well as a corporate
option set up by the employer.
Thanks to its incentive to employers
to match employee contributions up
to a maximum of €4,600 a year, double
the limit for the basic company
savings schemes, hopes for the new
system are high, with some 88% of
companies in the CAC40 are in a
PERCO (corporate) scheme or
planning to set one up within the
next two years.
While companies have responded
enthusiastically, not everyone is
entirely happy with the new system.
“The fiscal incentive is correct,” says
Hewitt’s Massieux. “But the problem
with the PERCO is that you
have to offer it to everyone; you cannot
target a category of employee.
Such a financial burden may be a disincentive.”
Companies wishing to target specific
groups of employees on
grounds of cost and/or the need to
distinguish the reward package for
its more senior staff are likely to
resort to DC schemes.
Another issue with the new retirement
savings schemes is the contradictory
signals that the government is
sending on the subject. Christel
Delaunay, responsible for communications
at Hewitt in Paris refers to the
measure introduced last year by
finance minister Sarkozy allowing
participants to make withdrawals
from these supposed long term
schemes. “The reason was a need to
boost consumption,” she notes.
“However, companies reacted
strongly, complaining that they were
being asked to promote long term
retirement provision on the one hand
while on the other their employees
were being encouraged to spend their
‘long term’ savings.”
To the further consternation of
employers the government proposed
a scheme via the Breton Law
whereby employees would be able to
draw down amounts from their savings
schemes each year. However,
the opposition of the employers
eventually made the government
commute this measure to a one-off
So how far is the market able to
absorb the additional cost of retirement
savings schemes? “The French
economy is not in a period of strong
growth,” says Campana. “The challenge
will be to incentivise companies
to set up schemes in the framework
of a low growth economy. It
will be difficult for both companies
and their employees to find room to
fund new pension contributions.”
While the economic outlook is not
particularly encouraging, necessity
has driven progress to a more balanced

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