For the many not the few
The 2007-2008 deadline for the amendment of the reform of the French retirement system initiated by the law of August 2003 is looming. The Pensions Advisory Council, the Conseil d'orientation des retraites (COR), has submitted a report to the government, which will be followed in January by a report from the government to parliament outlining steps to be implemented to strengthen the French retirement system, and in particular its pay-as-you-go (PAYG) component.
The COR report suggests that the 2007 deficit in PAYG system may reach €3.5bn, up from €1.9bn in 2005.
The COR calculates that in 2050, 1.7% of GDP will be needed to cover the deficit compared with a previously estimated 1.0%. The main scenario has not changed, assuming an unemployment rate reduced to 4.5% in 2015 would allow an increase in retirement contributions to be offset by a reduction in unemployment contributions. Under these conditions the PAYG system should achieve a balance by 2020.
But, the average pension benefit would have to drop by a further 10% from today's level in 2020 - that is, 60-70% of final pay. From these projections the role of pension savings funds, the epargne retraite, is obvious. The COR would also like epargne retraite to be more open and not limited to a few people, but not replacing the PAYG system.
AFPEN's contribution to the debate ahead of the 2007-2008 amendment is a call to make pension funds more accessible.
AFPEN wants the epargne retraite to be open and affordable to all. It suggests that the three products that currently exist, and which have arisen from the 2003 reform - the PERP, which is a private insurance pension plan, the PERE, which is an occupational insurance, and the PERCO, an employee pension - should obey general guidelines in order to benefit from social and income tax incentives.
AFPEN is promoting seven such basic guidelines. First, epargne retaite products should offer benefits that are only available on retirement and with specified minimum DC benefits which might be in the form of life annuities or a lump sum. Dependency risks could be covered separately from the retirement risk. In the case of DB schemes, the sponsor would be required to cover its undertakings via a separate entity, such as a trust that would have to be approved by the insurance authority.
The second basic guideline is mandatory representation of the interests of members in controlling the scheme through an advisory body that may enjoy the rights of a legal entity. Participating members could include insurers, asset managers and intermediaries.
Third, epargne retraite schemes should be set up through a voluntary agreement, with control of participants' interests exercised through the advisory body and with management handled separately from member representation. That agreement could be negotiated on the basis of the provisions of the social security and the labour codes.
Fourth, assets and liabilities of epargne retraite schemes should be segregated as such from any other assets of the managing companies.
Fifth, those assets and liabilities should enjoy the legal advantages existing under trust law and should not be drawn upon except to cover the operating costs of existing managers.
Communication on epargne retraite schemes - the sixth guideline - should be specific. It should be informative with a specific table about benefits offered and assumed risks. Performance results should be calculated using the internal rate of return on gross paid contributions.
Lastly, the transfer of rights from one epargne retraite scheme to another should be permitted provided the commitment to contribute may be terminated. Transferability of rights should be allowed through mutual recognition in the case of a change of a member's country of residence.
The extension of the epargne retraite to all should be achieved through its introduction into the social security code. Principles regulating taxation and incentives governing the three pillars of the retirement system should be common to PAYG, company and private schemes.
A credit tax open to those exempt from income tax could be established, and benefits could be exempt from tax provided a final levy at source based on present value of future retirement benefits is paid upon retirement. Also, tax reduction could be offered to promote education about the epargne retraite.
Vincent Vandier is executive director at the French Association of Investment Funds and Companies (AFPEN)