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Impact Investing

IPE special report May 2018

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France: All eyes on 2010

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Nina Röhrbein assesses France's approach to pensions regulation

The Fillon law of 2003 has been the driver behind the changes implemented to the French pension system since then and those still scheduled to take place.

Until 2008, citizens needed to have completed 40 years of work to be entitled to a full social security pension. But with effect from January 2009, the contribution period was lengthened by a quarter each year to reach 41 years by 2012.

Those who continue to work beyond the age of entitlement for a full social security pension in addition to being entitled to a full social security pension from 2009 will receive an annual bonus on their pension of 5% for every extra year of contribution until 65 from 2009, compared to 3% previously.

The Fillon legislation had scheduled a consultation exercise for 2008 - the Rendezvous - which should have discussed potential changes to the 2003 reform guidelines such as raising the contribution period beyond 41 years. But in the end it was generally accepted as a failure, particularly as the financial crisis coincided with the start of the Rendezvous discussions.

However, the government decided it would have an interim Rendezvous in 2010 ahead of the next major one scheduled for 2012. The focus of the interim one will be on whether the basic state pension should be transformed into a point-based or notional account defined contribution system or remain in its current form based on the length of contributions rather than the amount.

The Pension Advisory Council (COR) has been asked by the government to assess such a change.

The results of the study will be published in January, according to Denis Campana, retirement leader for Mercer in France. "If we do change to a different system, one of the issues will be the way we do it because there needs to be a transition period," he says.
But defined contribution has yet to become a serious issue in France.

"It will only become of interest in the mid-term future," says Campana. "As of today, employers do not feel threatened by the pensions risk. They already pay plenty of social contributions so the implementation of an additional occupational pension scheme is not desirable to them. Of course, the replacement ratio risk already exists but in France people tend to save on their own. That is why employers are reluctant to add any new scheme."

In contrast, the unemployment of seniors - aged between 55 and 64 - is a hot topic in France, as less than 40% of them still have work. The law was changed at the end of 2008 as part of the Rendezvous to stop employers getting rid of employees in that age category and pushing them into early retirement. "Now if an employee decides not to leave he cannot be made to leave," says Campana. "Currently, employees retire as soon as they can. But if the replacement ratio decreases employers will have to motivate their employees to retire. Only when employers start to recognise this risk will they implement additional occupational schemes."

Like in other countries, the financial crisis and resulting unemployment have put a dent in the funding of the social security system. "Problems such as deficits used to be thought of as being in the distant future but suddenly they are right in front of us, meaning that we have to cope with them much more rapidly than we should have done before the crisis," says Campana. "These are issues the French social security and Agirc-Arrco have to manage." Agirc-Arrco are the compulsory supplementary PAYG schemes that make up France's second pillar along with a few other occupational pension schemes by certain sectors.

Agirc (the General Association of Managers' Retirement Institutions) was formed in 1947 for executives' pension arrangements, while Arrco (Additional Retirement Schemes Association) was formed in 1961 for non-executive workers in the private sector. "If deficits are a problem, decisions regarding Agirc-Arrco will be even harder to make," says Campana.

Agirc-Arrco decided to postpone any decisions about its future and the specific terms and agreements of the Association pour la Gestion du Fonds de Financement (AGFF) until 2010. The AGFF is an adjustment fund created in 1983, which makes up for the shortfall created by the fact that while employees can retire on the social security system as soon as they have completed 41 years of work, the retirement age of Agirc-Arrco is 65.
It was due to end in 2008 but was first prolonged until April 2009 and then again once more.

Now Agirc-Arrco is waiting for decisions of the first-pillar social security system before taking any action. "Once we know how the first pillar could be changed Agirc-Arrco can also decide what to do," says Campana.

The only funded DC systems of France's pension system available to all employees are the collective retirement savings plans such as the plan d'épargne retraite complémentaire (Perco). The Fillon law created fiscal advantages on all the contributions paid to them. They also allow employers to match employees' contributions by up to three times up to a ceiling of 16% of the annual social security ceiling (ie, €5,489 in 2009) a year for a Perco. However, the amounts invested in Percos remain relatively small with less than €2bn of assets under management, representing only a very small part of France's retirement system, according to Campana.

"As they were only launched in 2004, they do not yet carry a lot of savings," says Campana. "They also incurred large losses in 2008 but the risk they carry is still not as important as those facing social security and Agirc-Arrco."

Because Percos are linked to voluntary profit sharing schemes in companies they may also undergo a review in 2010.

 

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