Keeping a Rendezvous
Next month, or perhaps in April, France’s government and social partners will keep a Rendezvous with Pensions. Although the name hints of romance the concept is more mundane. It was introduced at the time of the last pension reforms, in 2003, when the then government decreed that progress should reviewed every five years.
It has been given additional significance by Nicolas Sarkozy’s promise during last year’s presidential election to tackle the thorny issue of special pensions regimes - the privileged arrangements that allow certain public sector employees in public utilities and the railway to retire early - and the strikes that marked his initial period as president as he moved to implement his pledges.
Reforms in the early 1990s had affected the private sector state pension, and a later attempt by premier Alain Juppé to tackle public sector coverage provoked strikes and demonstrations that were seen as a factor in his subsequent electoral defeat.
But in 2003, shortly after president Jacques Chirac had been re-elected on pledges to enact a major reform including the introduction of pension funds, there was a move to align the working period required to gain a full civil service pension with the changes for the private sector a decade earlier. But Chirac’s pensions minister, François Fillon, left the special regimes well alone.
“Those are the people who have the power to make people walk to work or cut energy so they are the most difficult ones to tackle,” says Gilles Glicenstein, president and CEO of BNP Paribas Asset Management.
Nevertheless, Sarkozy declared that he was ready to meet the challenge, and subsequent strikes, head on. In the event Sarkozy unilaterally declared victory. “The point to understand was that there was a real crisis in France, everything ground to a halt,” says an insider. “So the heads of the various public companies involved were instructed to get on with it and get an agreement, and the government declared that, politically, the special schemes have been reformed, that the working period required to receive a full pension is being gradually stepped up. But the key word here is ‘gradual’ because it will be a long time before any real change will be seen and what was given in terms of carrots was probably a lot more expensive than the reform of the regime.”
Sarkozy is not expected to play much of a role in the Rendezvous. “The 2008 reform is not a presidential initiative, it is not a new area like the special regimes policy was,” says Raoul Briet, president of the supervisory board of the French reserve fund, the FRR. “The Rendezvous is rather seen as a matter of normal government business.”
This means that it will be more a matter for two veterans of the 2003 reform - Fillon, who is now prime minister, and his pensions minister, Xavier Bertrand, who as a parliamentarian in 2003 oversaw the preparation of the debate on the reform, known as the loi Fillon, within the governing party.
“They have a very good technical knowledge of the issues and a good relationship with the social partners so I think they will be the two key elements,” says Briet.
“The government has three objectives for the Rendezvous,” says the insider. “It wants to guarantee the financial sustainability of retirement schemes, paying attention to inter-generational fairness and fairness in general; increase the employment of seniors because only 38.1% of people aged between 55 and 64 are still in employment; and encourage free choice for people preparing for their retirement.”
Sustainability is the key issue. The 2003 reforms were spurred by projections by the Pensions Advisory Council (COR), which showed that in the absence of further reform the state pension system would show a deficit of €11bn by 2020 and €37bn by 2040. And despite the loi Fillion the situation has since deteriorated. Although technical changes mean like-with-like comparisons are inexact, the latest COR financial forecasts see a 2020 deficit of €24.8bn, or 1% of GDP, rising to €68.8bn, or 1.7% of GDP, in 2050.
The major degradation of scheme accounts are expected to occur between 2008 and 2015, with the deficit widening from €4.2bn to €15.1bn.
Will these figures galvanise the Rendezvous participants into action?
“I think the trend is to continue adapting the parametric reforms and not make fundamental reforms,” says Briet. “Talking of the content of the Rendezvous, Fillon rejected any fundamental transformation like the solution proposed by [employers’ group MEDEF president] Laurence Parisot, which consists of creating one basic regime for all French workers, both private and public, with a direct link between contributions and pensions. This idea had been discussed in 2002-03, when it was considered totally unrealistic and unacceptable for social reasons and Fillon said it was not possible to envisage such a radical transformation. So in the French pensions debate there is no viable alternative to pursuing a parametric reform of the existing schemes and trying progressively to reduce the differences between them.”
Glicenstein agrees. “I don’t foresee any major change in the near future regarding the overall system, such as what people are going to get in terms of a percentage of their last income when they retire,” he says. “This type of question hasn’t been raised by anybody for some time and I think this is because there is some sort of political agreement not to focus too much on that. On the left, for example, they are trying to defend the PAYG system as the major pillar of the social security as much as they can. These systems were established after the war and although they have been adapted they haven’t really changed. But they have popular support so are politically extremely sensitive so no one really wants to tackle the overall system and change it.”
But he is unhappy with the situation. “What I regret the most is that for many years France has said we need a pension fund system with defined contribution to take care of us but it has not happened.
“During his 2002 campaign Chirac said there would be pension funds in France but then in the wake of the Enron scandal, the market downturn and equity risk the idea took on a negative meaning, even the words ‘pension fund’ were avoided and no one would talk about them,” continues Glicenstein. “As a result nothing was really done to push people into investing to protect themselves against the downgrading of their income. And in last year’s electoral campaigns no one talked about that.”
“I think [the Rendezvous] will probably be rather quiet and not as important as in 2003 when it was the first time we tried to reform after 1995,” adds Briet. “We have now to get away from the idea that it is impossible to reform without a crisis. We have to become more pragmatic, to scrutinise the situation every five years, to look at the processes and try to find a way to improve the system’s sustainability.”
“Paradoxically, although no pension fund has been created really for the private sector, the only real pension fund established was the FRR to support the PAYG system,” says Glicenstein. “It was supposed to receive funding from several sources including the privatisations and to reach €150bn in 2020 but we are far from that; today it is something like €35bn, which is not small but means it may reach €60-70bn, which is half of what was scheduled.”
When it was established, the FRR’s time horizon was set at 2020. Five years later Briet hopes that the Rendezvous discussions will move the horizon forward. “My job is to try to convince politicians and the social partners to give a long-term view of pensions to people who are already worrying about it. This way they should adopt 2025 or 2030 in order to give some explicit guidelines concerning the funding policy of the FRR,” he says.
“If we were to adopt this 2025-2030 horizon it would become possible to have a clear discussion about what kind of FRR we want, what is expected from the FRR from 2020 and what are our liabilities, because now we have no clear view of our liabilities. And if we start discussing about that horizon we will also have to discuss about the period 2008-2020 because the role we will be able to play after 2020 depends, apart from our investment skills, on our funding.”