The case of UMR's failed cross-border pension plans may not be about French protectionism after all, Cécile Sourbès says.

Something is rotten in the state of France. Or at least that's what a letter allegedly sent by the country's insurance and pension fund authority to UMR advising it to drop its IORP plans in Belgium seems to suggest. Some in the industry have been highly critical of the Autorité de Contrôle des Assurances et des Mutuelles' (ACAM) alleged move to prevent the pension scheme from launching a cross-border fund. Others have denounced the "despicable" protectionist measures, arguing that the letter in question is yet another attempt by France to keep hold of its companies and wealth. One incredulous expert even asked me how France could "violate" the EU's principle of free establishment with such "total impunity".

I cannot help but wonder, however, whether the real issue behind the UMR case lies elsewhere. Way back in 2003, a lawsuit between a local pension fund and its pensioners came to light. The fund, called Cref, covered complementary pensions for civil servants such as teachers, policemen and postmen and fell under the aegis of the pension fund for the civil service, known as the MRFP. In the 1990s, the MRPF promised Cref members that it would index their pensions on the civil servants' salary regime, which meant those pensions were supposed to increase over time. But just the opposite happened. In 2000, a review of the pension scheme's funding revealed a deficit of €1.6bn. As a result, Cref members saw their pension rights plummet by 16% on average as the scheme was no longer able to meet its obligations.
 
Two years later, Cref participants brought the case to court, and the pension fund was held responsible by the High Commercial Court and then replaced by a new pensions vehicle known as Corem, managed by UMR. After several years of litigation, the State was also ordered in 2010 to pay more than €100m in damages to Cref members. In its judgement, the High Commercial Court argued that the State had failed – via its regulatory bodies, including the ACAM – to manage Cref properly.

These past events may shed some light on why the ACAM might recently have poured cold water on UMR's plans to transfer its second-pillar activities to Belgium. If the scheme were to move abroad, the new home country – Belgium in this case – would then be responsible for its regulation. With the High Commercial Court's rebuke still fresh in its mind, the French government would not want to be seen as failing yet again in its regulatory duties.

It goes without saying that Cref's former members would have taken a dim view of the UMR's relocation, but the current funding of Corem could be an even greater concern for them. Last year, a national association representing civil servants saving for their pensions, known as ARCAF, demanded that the UMR explain a €734m funding shortfall at Corem at the end of 2011, and expressed concerns over a similar scenario at Cref.

That's precisely what Charles Vaquier, chief executive at UMR, was referring to during a conversation we had at the beginning of last year. He told me the real issue in France lies in the discount rate, which is fixed at 1.9%. Under the plan originally set by UMR, its IORP in Belgium would have fixed its discount rate at 3-3.5%, provided the Belgian regulator approved the rate. He also told me at the time that local legislation would have enabled the IORP in Belgium to distribute around 20% more in pension provision than UMR can currently do in France for the same level of contributions.

So UMR is then faced with a dilemma. Should it leave the country in the hope of putting in place a more flexible funding scenario, despite the risk of unsettling contributors who have seen pension rights cut sharply in the past? Or should it remain in the country to allay both them and the regulator, despite the fact it might forego the chance of distributing larger pensions?

The choice is a difficult one. But it is safe to say that if UMR finds itself unable to meet its pension obligations, its contributors and its regulator will be plenty unsettled. Perhaps the crux of the issue lies in the fact that both seem to question the UMR's ability to meet its promises. The answer, therefore, might be to try to restore a degree of trust – not in the pension fund but in the state of France.