French retirees draw two or three pensions. The basic pension is paid by the state social security system. On top of that there is a complementary pension paid by an Arrco institution and, for managers, a management pension from Agirc. On average the basic pension represents 60% of their total pension income; the Agirc-Arrco system makes up the remainder. However, in the case of retired managers the Agirc part can make up the largest part.
The basic state system and Agirc-Arrco are compulsory and pay-as-you-go (PAYG). They make up part of France’s first pillar and to date have assured an adequate pension for most retirees. While the basic system is run by the state, the Arrco and Agirc systems, created by national agreements between employers and unions, are managed by the social partners.
After the first oil price shock in 1973 employment stopped increasing and unemployment started to rise. From 1976 Agirc had to take measures to restore its financial equilibrium by increasing contributions and revaluing pensions based on inflation and not on earnings. The golden age of the wage earner and of the PAYG system was at an end and the golden age of saving and of capitalisation, forgotten in France since 1914, returns. In 1993, for the first time since the war, there was a decline in total earnings which served as a wake-up call.
The Agirc and Arrco schemes are based on a system of points. The contributions buy pension points whose price increases, in principle, in line with average salaries. At the point of retirement the points that have been purchased are added together. The value assigned to the points is fixed each year by the board and determines both the level of adjustment of the pensions in payment and the rights acquired by those still contributing. In addition to linking the value of the points to inflation, an agreement was reached in 1996 which would increase the purchase price of the points more quickly than the increase in salaries, which would then reduce the number of points earned.
In 1972, 100 francs of contribution earned 13.3 francs of annual pension. By 2004 this had fallen to E7.16 of annual pension per 100 euros of contribution. Meanwhile we had witnessed both an increase in life expectancy increased and a fall in the age of retirement. Not only that but the first baby boomers were reaching retirement age. Between 2000 and 2010 the annual number of new retirees should increase by 55% in the case of Arrco and 85% in the case of Agirc.
The Pensions Advisory Council (COR) is due to publish its projections for retirement schemes up to 2050. The hypotheses employed by COR included a significant reduction in the rate of unemployment but, on the other hand, a slight increase of the retirement age. In the case of men this would be a little over six months by 2020.
For women, the reform of 2003 made the fiscal treatment of early retirement less dissuasive and more actuarial, so the retirement age may even fall by a few months. By 2050, according to this hypothesis, the number of active workers should be lower than the number of retirees.
It is interesting to compare two hypotheses. The first is that salaries increase by 1.8% annually. If these conditions persist, the books of Agirc and Arrco are balanced in 2050. The second is that they increase by 1% per year which is closer to the reality of the last decade. In this hypothesis Agirc and Arrco are in deficit by 2013 and their reserves are exhausted by 2016. Why such a difference? Because the faster wages increase the more the gap between the amounts contributed and the pension rights indexed on inflation diminishes. If the regimes are balanced in 2050 it is because the purchasing power of retirees has remained stable while that of active workers has doubled.
What will really happen? The development of the economy and employment will be critical. But according to the actuary of Agirc-Arrco, Jean-Charles Willard, “the future of our regimes will look nothing like their past. The lasting impact of the ageing of the population will only change the conditions of their long-term financial viability.”
If the financial health of Arrco and Agirc receive the attention that they should from the social partners responsible for them, they will undergo considerable changes in their structures and management.
Through economic necessity and the concern of the social partners to achieve economies of scale a vast process of mergers between caissies de retraite (CdRs) is currently underway. The social partners have set a target for the end of 2006 that there should be no more than 25 social insurance groups each with one Arrco CdR and one Agirc CdR. Of the 80 Agirc CdRs and 150 Arrco CdRs of the 1960s there are only 25 and 38 respectively today and there might be as few as just 15 within a few years.
These groups are not just dealing with Agirc and Arrco pensions. They are attempting to develop additional provision, the employment savings or ‘épargne salariale’, and possibly supplementary funded pensions. Furthermore the social insurance institutions can include life insurance companies and, increasingly, mutual insurance companies.
The mutual insurance companies and the paritary social insurance institutions are becoming complementary. The former seeks individual membership, the latter collective contracts with employers; both are non-profit. The social partners have stated that the power should remain with the CdR.
The evolutions of structure are in line with the aims of the social partners, as well as with those of the state. The time when each institution developed its own IT system is over. Teams of IT specialists belonging to the main groups cooperate under the direction of Agirc and Arrco to construct a single ‘pension factory’. The regulations of Agirc and Arrco are simplified and have been brought closer into line with each other. Companies must have a single point of contact for both systems.
The reform of 2003 adds a ruling on communication. Starting in 2007, active members between 35 and 50 will, every five years, receive a statement of their pension rights acquired in all 30 state and complementary compulsory schemes. Full implementation is due by 2010. From the age of 55 active members will receive an estimate of their total future pension rights from all schemes given a variety of different retirement ages. Agirc and Arrco have been tasked with the implementation of this legal right to information.
So today Agirc and Arrco look like a vast building site.
Arnauld d’Yvoire is secretary general of the Observatoire des Retraites in Paris