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Top 1000 Pension Funds: Pressure for deeper and more thorough reforms

The government is working on new measures to overcome the growing pension deficit, which is expected to swell to €20bn by 2020, writes  Cécile Sourbes

French second-pillar pension schemes will continue to feel the brunt of pension reforms in the final months of 2013. In March, president François Hollande had already decided to reform the mandatory second-pillar pension scheme for industry and trade employees, AGIRC-ARRCO, to tackle its €4.5bn deficit.

No further measures are expected on the second pillar this year, however. The only action the government is expected to take will almost certainly focus on promoting company collective retirement saving plans, PERCO, and individual pension saving plans, PERP – both introduced with the 2003 pension reform.

As of December 2012, around 160,000 companies in France offered access to PERCO plans, which now amount for €6.7bn in assets, according to the French Asset Management Association (AFG). In comparison, 1.2m of French workers subscribed to a PERP last year, which represent around €7.6bn in assets.

But the fact that Hollande is not seeking to implement further measures for now does not mean the second pillar will be entirely free of reform.

Like their EU counterparts, many pension schemes in France currently have their eyes on the IORP Directive. Unlike countries such as Belgium, Luxembourg and Ireland, France has not created an IORP-compliant vehicle, which exposes some second-pillar schemes to Solvency II measures for pensions, and more especially to the capital requirements, as set under pillar one.

French pension schemes are also concerned about pillars two and three of Solvency II, which cover governance and transparency issues respectively. On these issues, like their EU counterparts, French pension funds fear that an increase in data reporting and tighter management supervisory controls could lead to additional costs.

With regard to the French first-pillar pension, Hollande has been working on a new pension reform almost since the beginning of his mandate and was expected to make a key announcement in summer 2013. This new set of measures will aim to overcome the growing deficit stemming from the first pillar pay-as-you-go system.

According to a government report released in December 2012, the pension deficit could swell to €20bn by 2020 if measures to counter it are not taken.

The pressure on Hollande’s government increased in June 2013 when the European Commission granted France a further delay in the timetable to lower its “excessive” deficit.
In return for the delay, the Commission recommended that France tackle a number of fiscal measures to revive its economy, including implementing new pension reform.

Hollande was well aware of the issues before Brussels made its recommendations. He therefore launched a communication campaign immediately following his election last year to alert the French people to the deteriorating financial situation of the pension system.

To that end, the newly appointed government held a social conference in July 2012. At this meeting, it agreed with social partners to set up a new pension steering commission, which was created in February 2013. The new Commission for the Future of Pensions is responsible for putting forward reform scenarios to ensure the balance of the PAYG system over the short, medium and long term.

In June this year the commission presented its conclusion to Hollande, recommending a series of measures such as further increasing the period of contributions, tax rises for pensioners and higher contributions.

Far greater than those measures, which had been discussed in 2003 and 2010 in connection with the pension reforms introduced by previous governments, the panel recommended a limit on indexation of pensions.

According to the steering commission, this would mean the most wealthy retirees – already paying as much as 6.8% of general social contribution (CSG) in tax – would see their pensions fall by one percentage point against inflation. The CSG, introduced in 1990, aims to fund health insurance family benefits and the Retirement Solidarity Fund.

One more recommendation is to align the methodology used to calculate pensions for civil servants with the one used in the private sector. While the pensions of civil servants are based on the average salary earned during the last six months of their career, pensions in the private domain are based on the average salary received over the last 25 years of a employee’s career.

This point is particularly controversial, as trade unions fear that a change in the methodology could lead to lower pensions for civil servants.

However, the government has made clear that this report is only based on recommendations and does not represent a roadmap as such.

Few options have been outlined. So far, the most probable assumption is another extension to the contribution period. Therefore, a deeper and more thorough reform will certainly be needed.

 

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