Alain Lemoine assesses some important implications for pensions and institutional investment in an election campaign notable otherwise for its silence on retirement issues
Awaiting the election of a government always brings suspense for those whose
outlook might be overturned by the winners' electoral programme. Pension funds and asset managers are no different. They have good reasons to wonder what the rules will be on 17 June 2012 after the last of the four crucial ballots taking place in France.
The presidential election has caught the public's attention, with a handful of major contestants fighting in the first round on 22 April for the privilege to go on to the second round on 6 May. But the winner will need the comfort of a majority in the French National Assembly, to be forged in two rounds of Parliamentary elections on 10 and 17 June.
In the meantime, one more reason for the pensions world to worry about the consequences of these elections is the suspicious silence of the candidates on retirement issues. This silence is actually drawing concern from the electors. In an early-March survey by Ipsos/Logica Business Consulting, two out of three French electors considered the presidential electoral campaign "uninteresting", probably because of the lack of focus on important subjects. A 73% majority of French citizens consider candidates "do not talk enough about" pensions, a topic that almost equals housing as their first concern.
Of course, the fact that the presidential campaign does not "talk enough" about retirement, does not mean candidates have left it off their programmes. The Parti Socialiste (PS) claims that "governmental measures on pensions are profoundly unfair and do not fix anything in the financing problem". The party says that "raising full retirement rights from the age of 65 to 67 mostly penalises women with incomplete working careers", and that the government's retirement reform of 2010 will not prevent the deficit from ballooning to €80bn by 2050, of which only €40bn will be financed.
The PS proposes five corrections to rebalance the system. First, is an increase in retirement pension levies on financial revenues to the same level as those on employment income.
Second, is to re-capitalise the FRR (Fonds de réserve pour les retraites) with increased taxes on banks.
Third, to "moderately and progressively" increase employee and employer pension contributions, although that might cause unrest as net costs would rise and earnings diminish, also eroding competitiveness.
Fourth, the PS says, "contribution periods will be lengthened, if necessary, with a simple rule: for each additional year of life expectancy, there will be six more months of contributions and six more months of retirement". This is not totally new, as the 2003 Fillon reform fixed a goal of maintaining a "career to retirement ratio" of 1.79, which meant each life expectancy gain had to be split between one-third in additional retirement and two-thirds in lengthening working time. The PS proposal is only somewhat more generous, but does not take the risk of abolishing this key point of the Fillon reform, which will implicitly raise retirement age over time.
And fifth, but not least, the PS has an ambitious plan to improve senior citizens' employment rate, given that France is still plagued with a low 38% rate of activity for those between 55 and 64 years.
While raising contributions and retirement ages are realistic, they are unlikely to attract votes. So one can understand why the PS has not sought to attract electoral attention to its retirement programme. Given the social unrest brought by the government's 2010 retirement reform, it is also understandable that President Nicolas Sarkozy's Union pour un Mouvement Populaire (UMP), has not wanted to draw attention to its own. Another reason is that the UMP proposes nothing more than the implementation of the 2010 reform, which voters are already experiencing.
The implementation of the 2010 reform has been accelerated in 2012. Retirement at 60 is a throwback. Its last beneficiaries retired in July 2011 but this was a mirage for many, as the average retirement age was already 61.5. The minimum retirement age will be 62 in 2017, and full retirement rights will be granted at 67, four months later than initially planned for the generation born in 1955.
There are also calls for notional retirement accounts, inspired by the Swedish approach of individualised pension calculations directly linked to workers' contributions to determine the pension to which they are entitled.
Other reforms include a merger of the AGIRC and ARRCO systems. "With its 35 compulsory retirement regimes, our system is incomprehensible and unfair", says Agnès Verdier-Molinié, director at Institut français pour la recherche sur les administrations publiques (IFRAP), a liberal think tank. IFRAP proposes to create one universal retirement system gathering all existing ones, merging AGIRC and ARRCO with the social security old age insurance CNAV (Caisse nationale d'asssurance vieillesse), and raising the minimum retirement age to 65 with 45 years' contributions. They also call for a 10% allocation of retirement contributions to a capitalised system.
But where will the money come from? Previous reforms have not stopped the drawdown of AGIRC-ARRCO's reserves to match an increasing demographic imbalance. This has been worsened by the economic slowdown biting on expected retirement contributions based at salaries, whilst plagued by 10% unemployment and anaemic wage increases. To offset the impact of the crisis, €11bn has already been earmarked from AGIRC-ARRCO institutions: €6bn was tapped from the reserves in 2009 and 2010, and an additional €5bn has been put into safe assets by GIE AGIRC-ARRCO, the central management body.
Over the course of 2012, more money will be drawn from decentralised institutions managing their part of the system's reserves. The institutions' managers first instructions were to "prepare to sell" their investments with positive returns to avoid losses on unsuccessful ones. Fixed income funds were therefore targeted first. But with the acceleration of the process since March, they are now considering selling some of their equity investments. The institutions might be forced to do so, anyway, when they return the proceeds of their fixed income reserves to fund the system. An extra constraint on equity investments will arise if they sell significant chunks of their 70% fixed income target allocation. To avoid exceeding the target allocation of 30% of their reserves in equities they will have to reduce equity investments.