France: Past successes slow progress
France’s stop-start approach to sorting its pensions problems needs to be resolved, says AFPEN
The very success of the French retirement system ex-plains why it is taking so long to implement employment-related pension funds in France. The outlook however looks positive for their implementation between the end of this year and the middle of year 2000.
France’s three pillar system can be divided between unfunded schemes financed on a pay-as-you-go (PAYG) basis and funded schemes. First pillar and third pillars dominate the landscape accounting respectively for 60.6% and 36.3% of total outgoings which could be of use to pensioners. PAYG settlements account for 96.8% of retirement outgoings and amount to E154bn or 12.1% of GNP. This should reach 15.8% in 2040.
For the last 50 years this French retirement system has been fulfilling its role effectively. Retirement pension levels have reached around 80% of gross pre-retirement income; and pensioners enjoy purchasing power parity with the active population.
Universalism has been achieved. Social security schemes cover each and every worker in France. The only category of people not benefiting from specific tax advantages to build up supplementary pensions are industrial workers.
But the system is now in crisis. There are three reasons for this: longer life expectancy, high unemployment and falling salaries. The PAYG schemes face increasing deficits rising from around E8.5bn in 1995 to E152bn in 2040. By then, deficits due to civil servants and ‘assimilated’ civil servants or state controlled companies should account for more than 45% of that figure.
To meet this crisis, reforms have been im-plemented already. Following the Veil Act of 1993, the basic social security scheme has been revamped at least up to the year 2005. The years of service required to obtain full pension benefits at the age of 60 have been extended from 37.5 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 ten.
With the agreements regarding ARRCO in 1993 and AGIRC in 1994, contribution rates have increased. And the 1996 joint agreement has meant the unification of AGIRC and ARRCO contribution rates and of the value given to pension units. There have also been a number of other measures implemented on the solidarity side. But none of these have been sufficient to meet the future challenges.
The previous French government was happy with the reforms implemented during this period. Social partners were due to meet by the end of 1999 to undertake a general review of the retirement provisions governing AGIRC and ARRCO. However, the government abandoned its attempts to deal with the public sector retirement provisions following the strike in December, paralysing France for the entire month, in response to a move to question the vested rights of railway men.
The new Jospin government, aware of the high sensitivity of retirement issues, decided to start from scratch. It commissioned a report from the Commmissaire General au Plan, Jean-Michel Charpin, to undertake an overall analysis of the future outlook for the mandatory PAYG schemes. This report had the courage to raise questions of fairness between private and public sectors, bringing forward, for the first time, the concept of actuarial fairness. Charpin suggested three sets of reforms: firstly, a steering body should review retirement provision periodically; second, a reserve fund should be set up amounting to about 3% of GNP to smooth contributions for payments for the problematic years starting in 2005; third, some technical measures, such as extending the minimum years required to get full benefits to 44.5 years, linking contributions to wages and benefits to prices in order to provide for a decent replacement ratio at retirement age. It suggested also having more actuarial fairness for allowing early retirement. It refuses however to increase contributions, considering the increases since 1993.
In October last year, Dominique Strauss Kahn, Minister of Finance, and Madame Aubry, Minister for Social Affairs, published a joint communiqué paving the way for pensions funds. This has committed the government to introduce a law by the end of this year which will repeal La Loi Thomas and in turn favour collective bargaining, solidarity and provide protection for plan members. This means giving trade unions a major role when setting up a pension fund with voluntary contributions from employees; giving tax advantages to the lower income and contributing to mandatory PAYG schemes; and entails life annuities with the possible limited lump sum payments.
The EC's green paper on supplementary pensions has also been a stimulus to the government. It will have to respond to the draft directive and will be keen to promote its own model and its own understanding of the prudent man principle, which will be at the heart of the EC's guidelines. So far, what has been proposed in the communication is in line with the key elements that AFPEN wants to promote.
Association Française des Régimes et Fonds de Pension (AFPEN)
Executive director: Vincent Vandier
Address: 20, rue Quentin Bauchart, 75008 PARIS, France.
Telephone: +33 1 53 57 35 50
Facsimile: +33 1 53 57 35 59
Internet site: http://www.afpen.tm.fr
Date formed: 1995
Number of members: 160
AFPEN considers that a pension fund’s purpose is to offer a retirement promise originating from accumulated savings, managed collectively with the involvement of social partners on a long term basis within a dedicated vehicle.
The retirement promise should be for a life annuity with reversionary dependant’s pension rights,with a limited lump sum payment at retirement. Additional guarantees should be offered, such as for dependency. A dedicated self-supporting vehicle, subject to specific prudential rules and regulatory authority should offer the promise. The assets and liabilities, as well as the reserv-es covering solvency or minimum funding requirements, should be segregated.
The negotiation to set up any occupational scheme should favour collective bargaining with a steering of the promise by the executive of the vehicle in connection with the plan’s sponsor and members. Management should be professional with outsourcing being under periodic review. Independent experts, such as actuaries should be called in. Communication should take into consideration the social sensitivity of a retirement promise and its long-term nature. Performance measurement should be standardised and an independent body assessing the adequacy of the means set up in order to fulfil the promise could give a quality kitemark, or logo.
Insurance should be provided against system failures. The pension industry should enjoy the benefit of a professional association. Contributions should have tax incentives. Mediation should be the rule of the game before going to Court.
The Observatoire des Retraites
The Observatoire des Retraites was created in 1991 by the social partners. Under the control of the State, they manage the Caisse Nationale d'Assurance Vieillesse (CNAV) which provides the basic pension for the salaried workers in the private sector. They have also established a national supplementary scheme for executives, AGIRC, in 1947, and another one, ARRCO, for salaried workers, in 1961. These schemes cover 18 m active and retired workers.
The mission of the Observatoire des Retraites is to :
p encourage research and reflection on pension questions,
p monitor European pension developments,
p provide reliable information
The Observatoire des Retraites is sponsored by AGIRC and ARRCO and supervised by a board of administrators composed of administrators of AGIRC and ARRCO, including their respective chairmen and vice-chairmen. Half represent employers’ organisation and half trade unions. The president, Francis Bazile, is an employer and is vice-chairman of the Caisse Nationale d’Assurance Vieillesse.
The Observatoire des Retraites is assisted by a scientific committee of French and foreign experts specialised in the area of demography, social law and economics. It is managed by Arnauld d'Yvoire, secrétaire général.
AFPEN and the Observatoire des Retraites participate as observers in EFRP with the aim of a mutual exchange of information and understanding.
Observatoire des Retraites’ web-site www.observatoire-retraites.org, provides information on retirement in France and includes a discussion forum.