France opens a narrow window
Vincent Vandier of AFPEN looks at the latest movements towards pension reform
The reform of the French retirement system is at the forefront of public debate in France.
So far the retirement system has been a success with a replacement ratio varying from 65 to 80% – depending on income and providing power parity between actives and retirees. Social security schemes cover every worker.
Funded schemes are available in a limited way for workers in large companies, for civil servants, the self employed, elected people and farmers. However, there are no existing regulations for medium-sized firms to set up pension funds or to take into consideration long-term retirement obligations and commitments. The Thomas law, which was passed by Parliament in March 1997, was never implemented.
The French retirement system is divided into these three pillars:
o The first pillar includes the social security and complementary regime of AGIRC and ARRCO, which are under the co-ordinating regulation 1408/71, and accounts for 65.4% of total outgoings of E240bn;
o The second pillar accounts for 4.9% – 53.3 % of which are funded schemes provided by insurance companies, provident institutions or mutual arrangements. The balance is for employee savings plans not strictly for retirement; and the
o Third pillar, including all forms of long term individual savings accounts for 29.6%.
Retirement outgoings amount to E184bn, out of which 86.4% are ‘pay-as-you-go’ settlements and 10% are estimated as being individual insurance contracts.
Initiatives arise from two sources firstly at the European level, secondly at the domestic level. They will revamp a system, which has been, so far, a success but which is jeopardised by the demographic time bomb and a competitive world, which do not accept anymore compulsory withdrawal.
At the European level along with bodies AFPEN, CEA, AEIP, or CES, the French government is working with the European Commission at drafting the document on ‘Supervision of institutions for occupational retirement provision’ which should ultimately develop into a directive regulating pensions funds
Domestically, two processes are underway. The first, since early January, MEDEF, the employers organisation has taken the initiative with workers’ unions to recommence social dialogue. Among the selected themes are complementary ‘pay -as- you-go’ schemes, starting in March and pension funds starting this autumn. Discussion should be completed by year-end.
At a press conference in March, the Prime Minister Lionel Jospin, launched the latest reform of the French ‘pay-as-you-go retirement system’, opening a narrow window for funded retirement schemes.
This comes after the reforms of 1993, 1994 and 1996. Following the Veil Act of July 1993, the state social security scheme, which does not cover civil servants, will continue to be revamped upto at least 2005.The years of service required to obtain full pension benefits at the age of 60 have been extended from 37.5 years to 40 years while pensions will be linked to the consumer price index as opposed to the wage index. Pension rights will be calculated on the basis of the best 25 years instead of the last 10.
Following the ARRCO agreement of 1993 and the AGIRC agreement a year later, contribution rates have been further increased. The joint agreement between AGIRC and ARRCO (1996), has resulted in the contributions rate being unified, as well as the value given to pension units.
The new reform aims at the whole French retirement system with the main emphasis borne by the civil servants and the assimilated civil servants. According to the Charpin Report, by 2040 the workforce will be reduced by 1m while the number of retirees will have increased by 10m reaching 33 % of the French population compared to 27% in 2020 and 20% in 1997. It is estimated that retirement benefits on the unchanged basis could account for 15.8 % of GDP compared to 12.1% in 1998 and 14.1% in 2020. The deficit faced by the pay as you go system should increase from around E12.5bn in 1998 to E152bn in 2040 and E58bn in 2020. The civil servants that make up 20% of the working force would account for 60% of that deficit by 2020 and 45% in 2040.
The criteria set out by Jospin’s latest reform is that of dialogue and negotiation, fairness, solidarity and sustainability and responsibility and flexibility and the caring for the elderly.
For civil servants, an ‘alliance for retirement’ will be negotiated with social partners. Each specific retirement scheme will have to keep to its retirement promise. For example, fairness for workers in the public sector should be taken into consideration. The solution for this should come from increasing the minimum required years for full retirement benefits from 37.5 years to 40. This would then be in line with the private sector and away from the idea of going nation-wide to 42.5 years as proposed by Charpin.
The setting up of a ‘Steering Retirement Council’ (Conseil d’orientation des retraites) with representatives from parliament, social partners and qualified persons, will be put in place to publish periodical reports appraising future retirement provisions.
Solidarity and sustainability of the existing retirement ‘pay-as-you-go’ system will be supported through additional funding of the reserve fund set up last year. Investment should reach E152bn by 2020 or about three years equivalent of the uncovered liabilities at that time. They will benefit from the excess arising from social security; from the old age solidarity fund (FSV); and from various levies and taxes. Income from investment should account for one third, based on a 4% rate of return assumption.
Solidarity and caring of elderly will be achieved through a revamping of the existing dependency benefits, which do not meet the requirements At the moment, only 120,000 people are covered while the need is for 1.3m to be covered.
Flexibility and responsibility will be important for allowing people to decide their retirement date at a fair cost. People should also be given the opportunity to join long term savings collective schemes set up after negotiation. This formula seems to rely on the development of employees’ savings, as suggested by the Balligand de Foucauld report of February 2000. It is an alternative, which will lead to real pension funds providing annuities.
A retirement system should aim at arriving a replacement ratio. It is allocating existing wealth to people who are no longer directly active. That allocation is made through ‘pay-as- you-go’ settlements or thanks to funded schemes. The ‘pay-as-you-go’ system, in order to be efficient, has to be nation-wide and mandatory. Pension funds, on an occupational basis, maybe voluntary. Pension funds are indeed funded schemes which give a proprietary right to the creation of value generated by labour and capital invested voluntarily during working life with the assistance of employers in order to get a steady income at retirement time. They may be run involving the co-operation of social partners.
Vincent Vandier is executive director at AFPEN Association Française des Régimes et Fonds de Pension in Paris