The March 2013 agreement on Agirc-Arrco retirement reform is a relief for asset managers, and could staunch years of withdrawals by 2014, says Alain Lémoine

Over the last three years, withdrawals from the Agirc-Arrco pension system have accelerated due to the increasing deficit caused by the booming retired population and lower contributions due to the economic crisis.

Considerable assets had to be tapped from Agirc-Arrco’s institutions to help pay for pensions – €6bn between 2009 and 2010, €5bn more in 2011 and an additional €4bn in 2012.

Last autumn, the picture was very gloomy; hundreds of Agirc-Arrco board members from the decentralised institutions attended a presentation organised by the GIE Agirc-Arrco central body to hear that reserves at Agirc-Arrco had decreased from €67bn at the end of 2005, to €55bn in 2011 and about €48bn in 2012.

According to a scenario presented on 20 November, extrapolated from existing figures, Agirc reserves were expected to dry up by 2016, while Arrco reserves would evaporate by 2020. The picture may have been exaggerated to trigger new reform. Nevertheless, the threat had the expected effect, as the March reforms show.

For 2013, GIE Agirc-Arrco at first announced that it would take another €2bn from the participating social protection groups (Groupes de protection sociale, or GPS), and asked them to “prepare to sell” some assets and hand-over the money on 1 July.

By the end of March, however, it had reduced its target to “only €1.5bn” on 1 October (€1bn from Arrco and  €500m from Agirc).

In addition, GIE Agirc-Arrco is tapping GPS’s liquid assets, forcing them to keep just nine months of spending in their social funds and six months for their operational expenses (administration, software developments, and so on).

This new rule is deemed unfair by institutions who had cautiously built-up operational savings for decades.

At Humanis, one big Agirc-Arrco institution, the social fund’s reserve has reached €155m. At Audiens, the Agirc-Arrco institution for the press, entertainment and advertising industries, the new rule will reduce the buffer funds from two years to nine months (a 62% decrease) in the social fund, and from three years to six months (or an 83% cut) in its operational reserves.

For GIE Agirc-Arrco, the whole measure is expected to bring-in €1bn more, which will be reallocated to paying pensions, but also to help some decentralised institutions unable to cover their costs. “Good managers pay for the bad ones,” regrets one board member of a thrifty GPS. “What does it serve to be cautious if it’s used to bail out the lavish ones ?”

In any case, all these efforts should rebalance Agirc-Arrco, and restore confidence in the sustainability of this pay-as-you-go system. Financial reserves are already stabilising, thanks to better market performances. Bond and stock price appreciation generated a compound yield of more than 12% on pension reserves in 2012, which did more than offset the withdrawals needed to pay last year’s deficit between contributions and pensions. Longer term, the fate of pension reserves will rely on contributions, a key retirement parameter depending on dubious growth and employment perspectives.

It is probably too early for asset managers to line up for a hypothetical rebound in Agirc-Arrco reserves. But the reform is a big relief. First, Agirc-Arrco should stop tapping its reserves to fill the growing gap between pensions and contributions. The March reform only solves part of the problem, but it should be followed by broader reform to the first pillar.

Talks to reduce the social security pensions deficit should start this summer, led by the government. One solution could be to increase again the number of years of contribution needed to receive a full social security pension. It might sound hypocritical, but lengthening contributing careers, in line with life expectancy, seems politically more acceptable than a blunt rise in the legal retirement age.

Once this likely social reform is agreed by parliament, Agirc-Arrco will have to change its own rules. As a result, Agirc-Arrco contribution requirements should be lengthened, which will bring in more money, and the retirement age should be raised, which will slow the explosion of pension costs.

This is not the first time Agirc-Arrco has escaped from a dangerous path threatening its patiently built up pension reserves.

When the recession of the early 1990s ate away at contributions, Agirc-Arrco had to face up to a €1.25bn deficit between pensions and resources – a situation as unpleasant then as today, given the amounts at stake at the time. If it had not been fixed, reserves would have vanished and the system would have crashed.

Bankruptcy is not an option for Agirc-Arrco, as it is required to keep the balance-
sheet neutral over the long term and use its reserves to adequately adjust the parameters of the system.

Three sets of reforms have taken place – for Arrco in 1993, Agirc in 1994 – with a broader agreement in 1996, which included two years of frozen pensions rights, similar to today’s plan. According to some unions, the reform avoided a €92bn deficit, and pension reserves were allowed to grow again.

This time, excluding market effects, Agirc-Arrco reserves could start growing againby 2016.