Reform of the French retirement system is slowly taking place, with initiatives coming from various directions – the government, professional associations such as Afpen and Medef, the main employers’ union, and the European Commission. Some concrete decisions have been taken and the outlook for the development of pension funds, if not bright, is positive.
At a press conference in March, Lionel Jospin, the prime minister, launched the government’s latest reforms. Aimed mainly at reforming the pay-as-you-go (PAYG) system, they have side issues that raise hopes for the development of professional, funded retirement schemes.
Several reforms were announced:
o An ‘alliance for retirement’ will be negotiated with social partners on behalf of civil servants.
o Each public retirement scheme will have to keep to its retirement promises.
o Fairness compared with workers in the private sector should be taken into consideration.
o The minimum number of years required to obtain full retirement benefits should rise from 37.5 to 40 in line with the private sector.
o Bonuses should be included as one of the factors taken into account for retirement income.
o A conseil d’orientation des retraites, or retirement steering committee, will be set up.
o A flexible retirement age will be encouraged by promoting actuarial neutrality
o A retirement reserve fund will be established.
o Long-term savings will be encouraged.
Already, some concrete steps have been taken or are in progress. The conseil d’orientation des retraites was set up by decree on May 10. The steering committee’s main mission is to look after the sustainability of the pay-as-you-go system. It will have to publish a periodic report appraising retirement provision in the future. Its board of 33 includes four representatives from the government, three from the National Assembly, three from the Senate, four qualified experts, one representative for families through Unaf and one representative for retired people through the CNRPA. So far, Medef has refused to participate.
Discussions about the reserve fund are still going on. So far it is a subsection of the fonds de solidarité vieillesse. The questions under discussion are how to segregate the reserve fund from the state and how the fund will be managed. The amounts involved are substantial. By 2020, cash inflows should be E152bn. Some specific contributions are provided for in the draft law for social security financing, which also provides for a registry of pensions and retirement benefits offered by PAYG compulsory schemes.
Parliament has passed a law regarding employees’ savings. Employee savings plans go back to the end of the 1950s, with approximately E30bn invested and with yearly contributions of E7.5bn. The first reading of this draft law took place in the National Assembly on October 4 and 5, and in the Senate on November 8 and 9.
The law has many objectives. Firstly, it aims to improve the three kinds of occupational savings schemes – the participation, which is a share of company profits, the interessement, which is a sharing of positive results linked to performance, and the plan d'épargne entreprise, which is a voluntary contribution from the employer linked to a voluntary contribution from the employee, with the savings blocked for five years.
The second objective is to increase participation from smaller companies by allowing the creation of a plan d'épargne interentreprises (PEI), through collective agreements on a territorial or industry-wide basis. Other objectives are to promote the “solidarity economy” and the role of the employee as a shareholder.
Last, but not least, the main objective is to promote a new long-term saving product, the plan partenarial d'épargne salariale volontaire (PPESV), which should have a minimum duration of 10 years. Set up by a collective agreement it should help to promote the solidarity economy and self-investment in company shares. It has been considered by the unions and by some political parties as a kind of pension fund. To avoid any misuse of funds, a tax of 8.20 % was set to be levied on the employer’s contribution.
The project has been amended in its reading in the Senate, alleviating some constraints and adding some new ones:
PPESVs and PEIs may now be set up by referendum or through working councils. The 10-year duration of the PPESV will be applied to each payment and not to the PPESV scheme itself. The 8.20 % tax on the contribution of the employer has been cancelled. Questions about the participation of employee shareholders on the board of listed companies will have to be raised at shareholder general meetings every three years. Five per cent of any increase in capital will have to be offered to employees.
The next parliamentary step will be a joint commission between the two houses of parliament, which should convene on January 17 next year.
The PPESV can in no way be considered as a pension fund. Its objective is saving and not retirement; its duration is too short; the contribution from the employer is linked to the contribution from the employee; the tax advantage is linked to an employee’s status and not to the individual; representation of participants is not made on the basis of one man, one vote; and the investments are not managed by an institution dedicated to the PPESV. Investment market risk is borne by the participant, investment limitations prevent long-term, prudent allocation of assets, and prudential rules do not allow for the payment of life annuities. All these differences are taken into account within the principles and guidelines promoted by Afpen. However, parliament has been adamant in its opposition to pension funds, so a clear dividing line has been drawn between a saving product and a retirement vehicle.
The approval by the European Commission of the proposal for a directive on the co-ordination of laws, regulations and administrative provisions relating to institutions for occupational retirement provisions will help to promote pension funds. The draft directive meets four main objectives: ‘security’ through externalisation of investment and liabilities and a requirement to cover technical provisions with adequate funding; ‘accountability’, with a requirement to provide a minimum of information; ‘efficiency’, when applying for the ‘prudent man’ rule principle; and ‘mobility’, when promoting cross-border affiliation.
The draft directive should be improved to protect the beneficiaries. Firstly, its scope should cover all occupational pension schemes to be managed by an institution for occupational retirement provision. Secondly, to reach a level playing field between all service providers, all providers of pension schemes as defined by the directive should have to abide by it. Exclusion should be very limited.
Thirdly, funding of liabilities should cover technical provisions as well as investment risk or performance guarantees. There should be a minimum funding requirement in line with the insurance life directive. Fourthly, the investment rules should include a limit per issuer and on unlisted investment. One should not forget also that beneficiaries may play a role in steering their retirement plans.
Another piece of good news is the agreement reached on October 17 between the social partners and the government to modify the unemployment insurance scheme. This is one of the main priorities of Medef – to ‘refound’ the social system by promoting accountability and the responsibility of social partners. The French unemployment scheme is managed by the social partners through Unedic.
The employer side – mainly Medef and three of the unions, CFDT, CFTC and CFE-CGC – wanted to link indemnisation to a commitment from the unemployed to do their best to find new jobs. Applicants now have to sign a plan d’aide pour le retour à l’emploi. On the other side, the government, whose agreement is necessary to make the scheme compulsory, and two unions – CGT and FO – were opposed to automatic sanctions in case the applicant was not ready or willing to accept proposed positions. A solution was found in the end that alleviated the effect of automatic sanctions. This agreement is a good omen for pension funds.
The second priority of Medef is to review the complementary retirement schemes of Arrco and Agirc, which will again raise questions that Medef and Afpen are keen to have answered.
Vincent Vandier is executive director of Afpen, the French professional association for pension funds, in Paris