Sarkozy and Fillon: champions of reform

Francesca Fabrizi asks what the Sarkozy/Fillon union might mean for French pension provision going forward

On 6 May 2007, Nicolas Sarkozy, head of the ruling right-wing Union for a Popular Movement (UMP) party and former interior minister, was elected as France’s new Président de la Republique, winning 53 per cent of the French vote against Socialist candidate, Sègolëne Royal.

Ten days later, Sarkozy officially began his five-year presidential mandate when former President Jacques Chirac handed over the Presidential palace keys and nuclear codes. Sarkozy then surprised
no-one by appointing his close adviser and former social affairs minister, François Fillon, as the country’s new Prime Minister.

So what might this partnership mean for future of pension provision in France? Could dramatic changes be on the cards? Nothing can be certain, of course, until the second round of parliamentary elections is over (scheduled for 17 June) but Sarkozy’s UMP party has already won the first round with flying colours. And this comes as no surprise. Throughout his campaign, Sarkozy made no secret of his desire to reform France, pull it out of its sleepy lull and reinvigorate the workforce with a view to boosting the economy, and reform is what the French people seem to want.
But perhaps more significant for the future of pensions is the fact that the new Prime Minister, Fillon, is the originator of the famous Fillon laws which accounted for one of the biggest retirement reforms in France and which led to the creation of the PERCO (defined contribution) plan in 2003.

Under the new law, France also increased the number of years that civil servants must work to qualify for a full pension, from 37.5 to 40, in an effort to match the social security requirements for private sector workers. State-owned enterprise schemes, however, known as “les régimes spéciaux”, were excluded. These régimes cover approximately 500,000+ employees at state-owned companies such as the rail network, SNCF, and the utility company, Gaz de France, as well as the central bank. These employees therefore retire earlier and with a higher pension than other workers covered by social security.

Addressing this inequality, argues Jean-Eric Mercier, managing director of Fidelity in France, is likely to be high on Sarkozy’s list of priorities: “It is quite difficult to anticipate what is going to happen with retirement going forward as, during the election campaign, neither of the two last candidates really outlined their programme on the retirement issue. On this topic, however, Sarkozy has mainly talked about les régimes spéciaux indicating that, for equitable reasons, it doesn’t appear normal to him that some French people contribute for 40 years whereas others would only contribute for 37.5 years. So it would not be surprising to see this question on the new government’s agenda.”

François Cheynet, head of the retirement business for Towers Perrin in Paris, agrees a major initiative for Sarkozy will be to convince the trade unions of the validity of a reform of these special schemes. “The pension reform of 2003, initiated by Fillon, was quite significant and so it is unlikely that Sarkozy and Fillon are going to abolish it or re-consider what progress has already been made. What is likely, however, is that they will use the fundamentals of this reform and go further with it by reforming those plans that were excluded in 2003.”

But this might be easier said than done, warns Cheynet, as there is likely to be strong resistance in the street. “Sarkozy said in his campaign that he wants to further reform the pension system – and in fact he is hoping to reform a lot of things in France and that is the reason why he was elected – but we know from experience that it could be difficult. Everyone still remembers Prime Minister Alan Juppé’s tentative plans to reform the Welfare State in 1995 which led to significant social conflict and weeks of strikes. That could happen again.”

On a more optimistic note, Cheynet argues that it is definitely a good thing that Sarkozy has come into power, with the general mood in France now a positive one. “Sarkozy was elected because he wants to reform France and the French public wants to see reform – the French electorate came out in full force to vote him in, and now I think they expect a lot of him and the new government; they are hoping for great things.”

Numerous surveys have indicated that the French population is already pleased with Sarkozy and Fillon’s work to date. For example, a poll by Ifop published in Le Journal du Dimanche said 65 per cent of respondents were satisfied with their President’s performance, and 62 per cent felt the same about their Prime Minister.

But while France is quite clearly crying out for change, is the country really in such a dire situation? Looking at the economy, James Macmillan, head of European equities at BlackRock MLIM, argues that it’s not all bad: “Yes France has become addicted to government spending and onerous employment practices, which are a burden on employers and a brake on economic growth; and compared to the UK and US growth looks pedestrian. But underneath this the French economy is in reasonable health and is very much a world leader in important sectors, including aerospace, tourism, food manufacturing, luxury goods and nuclear power.”

Therefore, he adds, if the new political leadership leads to a real political impetus to restructure and unload some of the employers’ burdens it will “set free the entrepreneurial spirit, allowing smaller and mid-sized companies, and the economy as a whole, to match the performance of France's world class companies that are prospering on the world stage”.

On a more macroeconomic standpoint, a separate study from Ifop confirms a report conducted by Fidelity in conjunction with SOFRES: 83 per cent of the French population are worried about retirement. In this context, says Mercier, the government has to reassure the French people about the durability of the first pillar, and especially restore confidence of those who are the most insecure regarding these issues.

“We also need to look further: 84 per cent of the French population know that they will have a financial problem at retirement age, but only 25 per cent of those under 25 have started to save money for their retirement. Others clearly say they do not know how to get prepared.” For this the reason, Fidelity has begun a communication campaign in France to raise awareness not only of the government’s new tools, such as PERCO, but also how to use them.

There is clearly a long way to go to improve the state of pension provision in France, but the country is quite clearly on the right tracks.