Plus ca change...

Major reform is needed to France's pension system, but neither government or workers appear ready for tough decisions, reports Christine Senior

After several years of contentious reform, fought over by unions, employers and the government, pensions in France have entered a quieter phase. Last year marked the fifth anniversary of the Loi Fillon, and also the so-called 'Rendez-vous 2008', when government ministers and social partners met to review the effects of the law, and make any necessary changes.

In the event the Rendez-vous was characterised by a lack of any major change. The Loi Fillon introduced measures to harmonise the various pension regimes that applied to private and public sector pensions, which were seen as giving unfairly generous pension entitlements to public service workers, so that all workers were required to have contributed for 40 years to a pension before they could retire.

It also launched saving schemes–the personal pension scheme, or PERP (plan d'épargne retraite populaire), for individual savers and the PERCO (plan d'épargne retraite collectif), organised within companies for their staff. A change taking effect from this year is that employees will need to work for one extra quarter a year to earn their retirement, so by 2012 they will be working 41 years, but that was already provided for in the Loi Fillon.
In 2007, the government finally reached agreement to bring pensions for railway and energy workers into line with the rest of the population under the 40 years of subscriptions rule– leaving it with no appetite for further difficult reforms, says Gilles Glicenstein, chief executive of BNP Paribas Asset Management.

"In order to get approval from the unions the government made a number of adjustments in a way that was finally acceptable to them, and it was able to show the public it had solved the remaining issue," says Glicenstein. "I think there was little enthusiasm for reopening a new discussion on pensions because it's very sensitive and difficult."

Changing attitudes
One of biggest problems still facing the French pensions system is the employment rate among older workers. France’s rate of 40% among those aged 55 to 64 year is among the lowest of all OECD countries, and compares with an OECD average of 53%.

A recent change in the law gave French workers the opportunity to work an extra five years to the age of 70 before retiring, but may have a limited effect against the backdrop of falling employment in a recession. Still, its importance is in the message it conveys.

"The decision is important to change the mindset of people," said Denis Campana, retirement practice leader at Mercer. "Most people still have in mind to retire at the age of 60. What is significant here is people must think rather of 70 – it important for people to understand they must keep working after 60."

Still more needs to be done to encourage employers to hold on to their "senior" workers, and concrete measures to promote this are still lacking."The government hasn't done anything significant to encourage companies to employ older workers," says Clementine Galles, of the strategy and economic research team at Société Générale Asset Management. "They want to increase taxes for companies that encourage early retirement, and they are talking of a tax for companies that don't hire enough older workers. I don't think they will do anything in the current economic conditions."

The importance of the pay-as-you-go occupational scheme means that assets backing pensions in France are tiny compared with other OECD countries, at only 7% of GDP. An element of the Loi Fillon that has proved a limited success is for the schemes to encourage more private savings to supplement social security and occupational schemes. Two types of savings scheme – the PERP, an insurance-based savings plan for individuals, and PERCO, a type of DC vehicle that companies could offer – emerged from the 2003 reform. PERPs have been the less successful of the two. "The amounts collected by contracts have been relatively low," said Jean Kimmel, at Watson Wyatt's benefits practice in Paris. "It's more an effect of marketing by the bank sector rather than a deep success. It's an insurance product mainly sold by the bank networks."PERCOs have made more of an impact, but the total amount of savings under the schemes was still only around EUR 1.5bn as of last March. Watson Wyatt has just completed research on the provision of PERCOs and DC schemes generally. Among the 73 companies responding to its survey, the firm found a big rise in the number having DC schemes or PERCOs since its previous survey in 2005-2006: 52% had a defined contribution scheme and 26% had a PERCO, compared with 12% having a PERCO two years earlier.

PERCOs allow employees to contribute on a voluntary basis, and the employer has the option of matching the employee contribution. The employer also enjoys tax incentives. The proceeds can usually only be taken at retirement, with limited exemptions such as to finance the purchase of a main residence. Individual savers in the plans benefit from lower institutional fees on funds offered, which employers are able to negotiate for PERCOs.
There is a strong link between PERCOs and more longstanding company savings plans, called plans d'épargne d'entreprise (PEEs). "In the survey 74% of companies have a savings plan and there is strong potential to add a PERCO to a savings plan," says Kimmel. "I would say it's almost certain that within five years you will have a PERCO in at least 50% of companies, because all those with a savings plan will be interested in supplementing it with a PERCO. There is ground for development of PERCOs within the companies."

Credit Agricole Asset Management has stepped up its service offering in response to the widening of the scope of the plans, to allow proceeds from profit sharing schemes operated via a PEE to be paid into the plans from this year.
"Our answer as an asset manager company is to develop more services and more advice for employees to make clearer the advantage of these plans," says Isabelle Coquelle-Ricq, head of marketing and RFP for employee savings schemes at CAAM. "We want to make the different advantages more evident to people. We use the internet, and have launched a range of simulators to help people decide their investor profile, their saving capacity and what they want to achieve."

The moment of truth
The reform of the country's venerable pay-as-you-go occupational scheme – AGIRC (Association Générale des Institutions de Retraite des Cadres) and ARRCO (Association pour la Régime Complémentaire des Salariés) – appears no nearer. For the moment the system is in surplus, with medium to long term reserves of around €50 billion in 2007, but over the longer term is unsustainable, as demographics mean there will be insufficient workers to support the retired. The moment of truth is likely to get closer as recession bites, and fewer workers contribute to the system.

"In the long term people will have to retire later and later," said Campana. "What will occur is this crisis in 2009 will mean less income, so what would have happened in 2015 or 2020 will happen sooner. The situation will be increasingly difficult to manage."

Galles says if nothing is done the replacement rate or the amount retirees receive compared to their salary – currently around 70% – will continue to fall dramatically: "If nothing happens and the retirement age is still 60 in 2050, the replacement for those that retire will be 40%. Even if we increase the retirement age to 65, which is what we observe in most OECD countries, this replacement rate will reduce to 55% which is still a sharp decrease."

The generous unfunded pension system in France means that extra saving for retirement has traditionally proved unpopular. And since Nicolas Sarkozy's accession, the emphasis has been on spending power rather than saving.
"Sarkozy was elected insisting that he would be a president for purchasing power," says Glicenstein. "What was upfront in debate was consumption, spending money rather than saving money. Until a year ago discussion was about pay rises, which weren't high enough, then the effect of rising oil prices and food prices damaging purchasing power."

While aware of the weakness of the pension scheme, people have tended to take the view that the existing system will provide. More needs to be done to encourage savings, says Galles. "People recognise the system has difficulties but implicitly they expect the government to solve the problem," says Galles. "In business whatever the age of people they have no idea of the replacement rate. The government is starting to inform workers but until now it has been for those above 55. But people need to start to save for their retirement when they are 30."

WRITTEN BY CHRISTINE SENIOR, A FREELANCE WRITER