mast image

Special Report

Impact investing

Sections

Turning the supertanker

Related images

  • Turning the supertanker
  • Turning the supertanker

Agirc and Arrco have been seen as the backbone of the French pension system for years. But how will they fair in the future? Alain Lemoine examines the options

Last month, ahead of the Rendezvous with Pensions, worried French pensioners took to the streets of Paris to demand higher purchasing power. Six months earlier, prime minister François Fillon had set the tone for the next round of pension reform, telling trade union leaders attending the 60th anniversary of Agirc, a key element at the heart of the French retirement system: “We will approach this Rendezvous together with a willingness to make it succeed during the first half of 2008.”

Even though the General Association of Manager’s Retirement Institutions (Agirc) and the Additional Retirement Schemes Association (Arrco) are only two of France’s 36 compulsory pay-as-you-go systems, they are by far the most important. They cover most private sector employees while the other 34 regimes covering other working status, including the so-called independents, a category that includes artists, lawyers, dentists, members of parliament, doctors, architects and farmers.

Agirc collects €16bn a year in compulsory contributions from 3.7m white-collar employees and pays out €15.8bn to its 2.2m retirees. Arrco collects €34.4bn from 18m private employees and pays €30bn to 11.3m retirees.

<

As the numbers indicate, Agirc and Arrco face their own demographic challenge. Retirement costs are growing faster than contributions and will soon threaten the fragile balance of these regimes. “If nothing is done, Agirc should be in technical deficit by 2010 and Arrco by 2018,” says Jean-Claude Angoulvant, (pictured left)  a consultant and a former director of Cavamac, the first pillar PAYG retirement system for insurance general agents.

However, there are hopes it won’t happen, first, because Agirc-Arrco have together accumulated a buffer fund of €55bn, which could be used to soften the impact of the demographic transition, and second, because the parameters of the regime will be adjusted to curb the dangerous effects of ageing on a pay-as-you-go plan.

Agirc and Arrco are managed by independent federations that include 21 and 33 retirement organisations respectively, hosted within 26 financial institutions as varied as mutual societies, insurance companies or non-profit associations. Since 2000, they have accorded foreign residents the same rights and obligations as French nationals and do not penalise citizens when they pursue a part of their career in another European country. But above all, Agirc and Arrco are paritarian regimes controlled by social partners elected by trade unions and employers’ organisations. Agirc and Arrco’s status needs to be approved by the government and their rules are enforced by the state, but their decisions are the result of a consensus or democratic bargaining at board level.

This governance specificity is key to understanding how they reform themselves in line with the expected pension reforms. One side of the reform is the lengthening of the contribution period required for full state pension rights to 41 years from 40 as planned in the 2003 reform. Experts are just waiting for the implementation of a decree, which could come in the wake of last month’s local elections. “From there, the contribution requirement for a full retirement will rise by three months each year from 2009 to 2012,” says Patrick Poizat, (pictured right) a representative of the CFTC union confederation. “Then there is a plan to raise the contribution period to 42 years, but there’s no deadline for that target in the law.”

This could be discussed as part of the Rendezvous in April or May, to be included a parliamentary bill in June. “Then the agenda of the Fillon reform in 2008 will match the next meeting of social partners for the next round of Agirc-Arrco bargaining,” says Angoulvant. “The contribution rate and the adjustment of the other parameters in Agirc-Arrco pensions are determined by an agreement signed on 13 November of 2003, which was planned to end in 2008.”

In practice, this 2008 deadline might be postponed. “One question for Agirc and Arrco is whether the 2008 bargaining will really take place this year,” says Poizat, who participates on the boards of both for its union. “It would be possible to delay the deadline by six months until after the 3 December election for the industrial tribunals, the Conseils des Prud’hommes, and give the social partners the means to negotiate without biased positions in a bargaining that might require courageous decisions to be taken.”

A delay of the retirement age by requiring a longer contribution period to the state old age pension is not bad news for Agirc-Arrco. Indeed a real financial dilemma was posed when in 1982 the government lowered the official retirement age to 60 from 65. Overnight, Arrco and Agirc were deprived of five years’ contributions and asked to pay the five years’ of pensions more than of their actuarial plans.

Social partners called upon the state to assist with the financing of this additional charge and another fund, the Association pour la Gestion du Fonds de Financement (AGFF), was created in 1983. AGFF gets a 2% contribution on monthly salaries up to €2,773, which brings in an additional €9bn financing for early retirement, on top of the 7.5% contribution rate to Agirc or Arrco, depending on the employee’s status. “This mechanism was planned to end by 2008 but it will certainly be prolonged as it could play a role in smoothing the difficult path of 2018,” says Poizat.

According to some estimates the lengthening of the contribution for a state pension should by itself generate some savings for Agirc and Arrco starting in 2011 and this could reach up to €1.3bn by 2025. Other measures are expected to help with Agirc-Arrco financing, including a government promise to bolster the employment rate for workers in their 50s, who are often abandoned by employers. In France, 37.6% of the people aged between 55 and 64 have a job, below the European average of 42.5% and far from the 50% target set by Brussels for 2010.

Increasing the employment rate to collect more contributions before retirement at a slightly older age might be just the recipe needed to save the French pay-as-you-go systems of the state social security pension and Agirc-Arrco from a gloomy fate. At least Fillon thought so when he wrote the 2003 reform as the then pension minister. “The legislation has introduced a measure that goes beyond strictly parametric aspects of the reform by introducing a form of indexing of the length of working life and the lengthening retirement time according to life expectancy gains,” explains Pierre Chaperon, delegate director of Arrco.

“The 2003 reform fixes a goal of maintaining a career to retirement ratio of 1.79, which means that each gain in life expectancy should be split between one third in additional retirement and two thirds in lengthening working time and contributions,” says Angoulvant.

In that context, state social security old age insurance and Agirc-Arrco must carry out their reforms hand in hand, even if they face their own challenges and rely on different financial tools, such as the FRR and the Agirc-Arrco buffer fund. Often compared, these funds have little in common. “The FRR aims to compensate deficits in several basic retirement regimes, such as the Social Security old age insurance, the CNAV, or the retirement scheme for farm employees but also regional employees of Crédit Agricole, whereas the goal for Agirc-Arrco’s reserves is to keep them as a buffer fund and continue managing them on a paritarian basis,” says Poizat.

But despite their fundamental differences and complete organic independence - being under separate supervision with their specific governance and with few occasions to compare their work - one cannot deny some resemblance in their management methods. Both use modern approaches in defining financial strategy with the help of consultants and stress-tested actuarial hypotheses, implemented through tough tender offer rules and monitored with demanding reporting standards and a scrupulous scrutiny. In addition, both the Agirc-Arrco reserves and the FRR will continue to operate huge mandates that will attract asset managers who want to showcase their skills.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2559

    Asset class: Multi Assets.
    Asset region: -.
    Size: EUR 15m (may be split into two mandates EUR 7.5m).
    Closing date: 2019-09-06.

  • QN-2560

    Asset class: Private Equity.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

  • QN-2561

    Asset class: Infrastructure.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

Begin Your Search Here
<