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En Marche for pension reform

President Emmanuel Macron’s promised pension system reform is a work in progress 

Key points

• France’s pay-as-you-go pension system is equitable but unsustainable, with contributions close to 28% of wages
• First and second-pillar compulsory pension schemes have a variety of specific rules
• The Macron reform will seek to unify pension rights and rules
• A points system is likely to be favoured over annuities or notional retirement accounts

President Emmanuel Macron made a promise during the electoral campaign that brought him to power in June 2017. He said: “We will create a universal retirement system where one euro of contribution gives the same pension rights, whenever it has been paid, whatever the status of the person.”

Maintaining his reputation as a fast reformer, the young president, who turned 40 last December, has opened the Pandora’s box of French pensions reform as he promised, albeit cautiously. Initially planned for this year, a law reforming the French retirement system has been postponed to 2019. To defuse opposition to unsettling changes, Macron has named Jean-Paul Delevoye as high-commisioner of pensions reform. 

The former ombudsman of the French republic from 2004-11, and chaiman of the Environmental, Social and Economic Council (CESE) from 2010-15, Delevoye gained a reputation as a listener and builder of consensual compromise. He will prefer to take his time and to consult all social partners and representatives of France’s pension schemes. 

“Our project is not to change the parameters of the retirement system again,” claimed Macron. “It is not to leave the pay-as-you-go [PAYG] principle, which is another word for solidarity between generations. It is to restore confidence and build a system fitting today’s and tomorrow’s work and life paths. It is to clarify and stabilise the rules of pensions, once for all, by setting-up a universal system, fair, transparent and reliable, in which everybody benefits from the exact same rights.”

Easier said than done. The efficiency of PAYG retirement systems is usually assessed by their capacity to achieve three goals – solidarity, fairness, and sustainability. Hitherto, the French pensions system has fulfilled the first two criteria. Even with lengthened contribution periods for full retirement rights (43 years in 2035 for people born in 1973, up from 41.5 years for those born in 1956), and an older minimum retirement age (age 62 since last year, versus 60 from 1982 to 2011), French citizens continue to enjoy longer retirement periods, thanks to life expectancy gains. Over 20 years, those reaching the age of 60 have gained more than three years of life expectancy, on average, up to 87.6 years for women (84.9 years in 1995) and 83.2 years for men (79.7 in 1995).

In terms of fairness, “the French retirement system continues to guarantee, on average, a satisfactory level of life to retirees”, observed Yannick Moreau, president of Comité de suivi des retraites (CSR, retirement monitoring committee), in her last report. The average pension, all schemes considered, was close to €1,400 a month in 2015, gross before tax. Although this is lower than the median salary of about €1,800, retirees pay lower taxes and their children have usually fled the nest, so in the end their standard of living per person is 6% higher than the whole population, on average.

The sustainability of the French pension system is more critical. As the second-pillar complementary PAYG scheme AGIRC-ARRCO has faced regular deficits due to economic conditions and demographic imbalances, these have had to be balanced out – which has not been the case for other schemes covering public workers, or even for first-pillar old-age insurance scheme (CNAV). 

“The French retirement system continues to guarantee, on average, a satisfactory level of life to retirees” 

Yannick Moreau

In 1996 the state stepped in to cover AGIRC-ARRCO’s deficit and created the Caisse d’Amortissement de la Dette Sociale (CADES, social debt amortisation fund), to manage and repay up to €260bn of social security debt over time, with the help of a dedicated social tax (CRDS or Contribution au Remboursement de la Dette Sociale). The state budget also pays for about half of the annual requirements of public employees’ special schemes, to make up the €41bn contributions they receive while serving €82.6bn in pensions. 

Raising the contribution level is not an option as a result of European rules. “By 2019, given already enacted rises, the legal contribution rate will reach 27.6% of gross salary, which is close to the 28% ceiling,” warns the CSR. In this situation “for the first time, CSR is driven to advise the government to take necessary measures to return the system to a balanced trajectory, either through reform of the system, or before [through a paremetric reform], or combining the two solutions”, the CSR recommended last year.

Unwinding complexity

Macron’s diagnosis of the French retirement system is relevant: “Our system is complex, unfair, and creates stress,” his presidential programme claimed. For instance, public employees’ pensions are calculated on their last six months of earnings before retiring, excluding bonuses, whereas private sector employee’s pensions are based on the best 25 years of earnings, including bonuses. People worry about whether the system is sustainable and if they will be asked to make new sacrifices.

France counts at least 35 different compulsory PAYG retirement schemes, of which 20 are so-called ‘special regimes’ covering specific categories of workers, industries or even companies – such as the national rail operator SNCF, or the Paris metro operator RATP – with huge differences in contribution and pension rules. Replacing them by a unified, transparent and balanced system is an incredible challenge.

PAYG retirement schemes usually rely on three different approaches to manage pension rights – annuities, points, and notional accounts. Many defined benefit schemes (funded or not) provide annuity rights, such as 1.2% of salary per year of career. The first-pillar CNAV scheme is more or less of this type, promising 50% of average salary of the best 25 years of carreer (adjusted for inflation with a ceiling). Other retirement schemes, like AGIRC-ARRCO, manage pension rights in points. The advantage is having a ‘currency’ linking contributions to pensions over a lifetime, as the purchasing price and pension yield per point are adjusted every year. Notional accounts, as used in Sweden, were mooted but have not been adopted in France.

pensions by origin

Different proposals

Two main reform strands are now on the table. The first involves a convergence, or merger, of the ‘special regimes’ with the CNAV system. Many have aligned their pension rules, but not contributions, under a mechanism of ‘liquidation unique des régimes alignés’ (LURA), enacted with the 2014 pension reform and effective since July 2017.

A second scenario would be to merge French first-pillar basic pension regimes, social security old age insurance (CNAV) and others, with the private sector second-pillar AGIRC-ARRCO. This option would help the government to solve the problem of the state employee pension regime, which barely covers complementary pensions, apart from the public employees’ additional retirement plan (RAFP, Retraite Additionnelle de la Fonction Publique), a funded scheme launched in 2005 with €30bn in reserves. A third solution would be to merge all first-pillar regimes with all complementary second-pillar schemes, but this would be highly complex.

In all cases, reserves will be at stake, as time will be needed to implement the changes gradually. “The current period is conducive to a thorough reflection on the future of the Fonds de Réserve pour les Retraites (FRR),” noted the CSR report. With €36bn reserves, FRR helps to repay retirement and other social debts, giving €2.1bn to CADES each year. But in 2024, once this debt will be fully repaid, FRR should be left with €19bn reserves “whose use is not yet defined”, according to the CSR. 

On top of the FRR, reserves accumulated by all French PAYG retirement system accounted for €118bn at the end of 2015, or 5.4% of GDP. The likely mobilisation of these reserves to help pass the forthcoming reform will undoubtedly reshuffle the cards for asset managers and their mandates.

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