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France: Supplementary pension scheme facing depletion

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The deficit of the Agirc-Arrco complementary pension system is exacerbated by France’s poor employment situation

Regulation in summary

• A report by the French auditors court has suggested that Agirc-Arrco, the main complementary pay-as-you-go scheme for private sector workers, could face depletion by 2023.
• Rising longevity and a poor economy were to blame for insufficient contributions.
• The civil service supplementary pension fund ERAFP has had rules around bond and real estate investments relaxed.
• ERAFP is to increase equity, illiquid assets and multi-asset allocations by 2020.

Some of France’s largest retirement funds experienced significant change over the past year with fundamental shifts in private and public-sector supplementary regimes.

Agirc-Arrco, the main complementary pay-as-you-go scheme for 18m private-sector workers and about 12m pensioners, has faced constant change since 2003. Last year was no different. As a result of France’s economic plight, the supplementary fund’s financial position worsened. In December 2014 the French auditors court, Cour des Comptes, outlined a system of reform with few positives for the scheme.

In a report ‘Ensuring the Future of Additional Private Sector Pensions’ the court said the fund’s deficit was becoming a problem. Some 6% of the pension payments were not covered by incoming contributions. The report blamed the economic situation for the contribution gap, as salary levels have fallen from 2009. The court warned Agirc-Arrco’s €72bn of assets could run out by 2023.

The message from the court was that social partners – employers and trade unions – have an urgent responsibility to plug Agirc-Arrco’s deficit. The government has intervened and put constraints on social partners’ demands to balance complementary pension schemes. Other responses are being explored. These includes greater cuts to retirement benefits, as suggested by employer’s organisation Medef, and penalties for early retirement, as high as 40% for retiring at 62 instead of 67, as well as cutting dependant benefits by 40%, where partners are currently entitled to 60% of their spouses pension. Discussions between employers, government and social partners will continue. However, the court’s report will serve as the basis for negotiation.

French retirement assets

Elsewhere, the €23bn French civil service pension scheme, ERAFP, has begun overhauling its investment strategy after the French government legislated for greater freedom. The supplementary pension scheme for public-sector workers was forced to invest 75% of its assets in bonds and real estate, and particularly French government debt. However, the government allowed ERAFP to reduce this to 60%.

The scheme, which has about €2bn in contributions to invest every year, had 51% in French government debt and 15% in European credit prior to the change, which came into effect at the start of this year. Given that liquidity in the scheme is not a problem thanks to its contribution levels, ERAFP will look to invest more widely in illiquid assets and take advantage of the illiquidity premium.

France Country Facts

The scheme will also look more widely at equity markets in the short term as in-house sentiment expects a wider a spread over bonds in the long term. It also expects to increase its inflation-hedging assets, while also committing itself to supporting the French and euro-zone economies. 

ERAFP said its future equity allocation would rise to 23.5%, comprising mainly European stocks, while multi-assets would rise to 4% by 2020. Real estate, 2% before restrictions were lifted, could rise to 10%. However, ERAFP warned it would exercise its freedom more quickly should the interest rate environment and the valuation of bond markets be suitable. It would speed up the rate of its shift into equities and real estate if interest rates remained flat.

France’s few second-pillar pension funds will have to contend with the Solvency II Directive and must implement it by the end of 2015. The prospect of implementation has restricted second-pillar pension funds from considering long-term, illiquid asset classes.

Regulations limiting pension funds from some alternative asset classes, such as infrastructure, remain in place to the frustration of larger schemes. Assets among French investors remained heavily exposed to fixed income and institutional allocations to other asset classes have stalled, according to the Association Française des Investisseurs Institutionnels.

The impact of the Alternative Investment Fund Manager Directive (AIFMD) caused some pension funds to look for alternative ways to invest. Some have adopted UCITS structures to bypass reporting requirements under AIFMD.

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