Pension funds are on the way in France. The next move will most likely come after the next presidential and parliament elections in spring 2002. This will help to give flexibility to the French retirement system and to meet the objective to provide for a decent replacement ratio and to reach parity between active members and retirees. At present, not more than 5% of economically active people in France benefit from pension funds. Considering the three-pillar system, total payments related directly or indirectly to retirement amount to e244bn. The share of funded professional schemes is 2.8%.
The first pillar, covering mandatory pay-as-you- go schemes amount to 62.7% of total. It includes social security general scheme, AGIRC and ARRCO covering workers from the private sector and schemes for civil servants and assimilated civil servants. The second pillar, with a share of 5.6 %, includes employee savings outside the retirement funded schemes. The third pillar accounts for 27.2 %, the bulk of it coming from insurance.
Pension funds exist in France only for limited groups of people. Civil servants with CREF since the 1950s and PREFON since 1967, members of parliament with FONPEL and CAREL, the self-employed with Loi Madelin on a voluntary basis, since 1994, tradesmen and shopkeepers with Organic Complémentaire, craftsmen with MNRA and ARIA are examples. Farmers enjoy also tax advantages originating from COREVA.
Need for reform
If French private sector workers cannot enjoy pension funds on the same favourable terms as civil servants they are also at a disadvantage when comparing the benefits which they will receive from the pay-as-you- go schemes. Most of the civil service schemes offer defined benefits granting 75% of last gross pre-retirement salaries. Meanwhile, mandatory pay-as-you-go schemes are defined contribution, experiencing the full impact of the lengthening of life expectancy. The latter has increased in France from 63 in 1950 to 74 in 1995. It is expected to increase further to 81 in 2040 with an extra seven years for women.
By 2040, the number of working people in France will be reduced by 1m, while the number of retirees will have increased by 10m. Pay-as-you-go schemes will face increasing deficits rising from e12bn in 1998 to e152bn in 2040. Cumulative deficits should amount to e2,757bn, or about the same as expected GNP. At that time, deficits due to civil servants and assimilated civil servants or state-controlled companies should account for over 45% of that deficit. The basic state scheme managed by CNAVTS should show a deficit estimated at e60bn. ARRCO and AGIRC schemes which, taken together, should show a global deficit of about e14bn.
To face this crisis, reforms have been implemented since 1993. Regarding the private sector, following the Veil Act of 23 July 1993, the years of service required to obtain full pension benefits at the age of 60 are being extended from 37.5 to 40 years, while pension benefits are linked to the consumer price index and no longer to the wage index. Pension rights are calculated in a progressive way on the basis of the best 25 years’ salaries instead of the last 10 years. With the agreement regarding ARRCO of 10 February 1993 and of AGIRC of 9 February 1994, contribution rates have increased to 6% for salaries up to the social security ceiling and to 16% from 8% for earnings up to eight times this ceiling. By joint agreement in April 1996, regarding both AGIRC and ARRCO unification of contribution rates and unification of pension units have been performed. Unification of both schemes is de facto under way.
Solidarity measures have been also implemented over the years. In 1981 the ASF was set up to compensate for the change of retirement age from 65 to 60. It is funded from unemployment contribution. In 1994, the Fonds de Solidarité Viellesse (FSV), was set up to compensate for non-contributing benefits. In 1996 CADES was set up to cover accumulated deficits from the health section of social security.
By now, four actors are playing their parts, the government and parliament, the MEDEF, the European Union and, last but not least, AFPEN. Parliament in January 2001 repealed the Thomas Law, passed in March 1997 to set up and organise pension funds. On 19 February 2001 the Fabius law on employee savings was passed, promoting profit-sharing schemes on a group and on a regional basis and for medium-term commitments.
The law establishing the Fonds de Réserve des Retraites was passed in parliament and published on 17 July 2001. It is an independent public entity owned by the state, managed by an executive board under a supervisory board. The investment strategy will follow the prudent-man principle with spreading of risks. Socially responsible investments will be looked at. Managed funds should by 2020 reach e152.5bn. They will then be used to contribute to retirement benefits. The management of the funds will be open for bidding to outside investments managers. Administration will be run by Caisse des Dépôts et Consignations.
The Conseil d’orientation des retraites was set up by a decree of 10 May 2000. It is a steering committee whose main mission is to assess the long-term sustainability of the pay-as-you-go retirement system. An advisory board of parliament, government, employer and workers unions’ representatives manages it.
Prime minister Lionel Jospin during his press conference of 21 March 2000 also offered the civil servants an alliance for retirement. Since the Charpin report of April 1999, it is understood that a certain parity or fairness must be reached between private and public sector. Solutions should come from increasing the minimum required years to get full retirement benefits from 37.5 years to 40 as in the private sector. So far nothing has started.
MEDEF, the main employers union, has initiated the ‘refoundation’ of the social system. The agreement regarding complementary retirement schemes, of ARRCO and AGIRC signed on 10 February 2001 is important. Through that agreement, AGFFF has taken over from ASF the cost for changing the retirement age from 65 to 60. It has also put down some basic principles such as linking the level of retirement benefits to the level of contributions, or to have some flexibility in choosing retirement age. This agreement will terminate by 31 December 2002.