Picture the scene: At 60 years of age and recently retired, you find yourself sitting on the French Riviera, Bordeaux in hand, as recollections of working life increasingly fade into distant memory. Add to this idyll the fact that you are in receipt of a pension worth 75% of your final salary and surely you would begin pinching yourself to ensure it was not all just a dream. Well, for the soon-to-retire French citizens, loom-ing pension reforms in France will ensure that it remains “just a dream” for a little while longer.

Since President Nicolas Sarkozy’s governing UMP party announced that there was to be an increase in the retirement age from 60 to 62, outrage has swept the country. According to the CGT union, around 800,000 people took part in over 117 demonstrations across France, although the Solidaires Sud (Sud) union put the figure at 600,000 and the interior ministry estimated 380,000.

Enraged unions oppose Sarkozy’s plan to increase the current pension age. In 1982, under the socialist leadership of President Francois Mitterrand, the opportunity to retire at the age of 60 – one of the lowest retirement age requirements in the EU – was set; and, since then, unthinkable to debate.

“In France, we used to have a retirement age of 65 before 1981. Our system, like many other European systems, such as Germany’s, is age dependent. When those systems were put in place after World War II, the life expectancy was around 15-20 years less than today. So it makes sense that, since we live longer and we pay out pensions longer, retirement should be post-poned by at least two years,” argues Dominique Dorlipo, managing director at Russell Investments.

On 21 July 2010, the new pension reform bill, which will raise the retirement age to 62 by 2018, by gradually increasing the active work life by four months every year, was approved by a parliamentary committee after its approval by the Council of Ministers. As a result, Labour unions have called for a strike, perhaps the biggest strike on this issue to date, to take place on 7 September, the same day that the bill is expected to be voted on by the lower house national assembly. The bill will then face Senate con-sideration and, despite national resentment, more than likely passed into law in October.

Denis Campana, retirement director for France at Mercer, however, is more concerned about the demographic changes of France: “What has been decided here in France is a strict minimum of what had to be done. Looking at the statistics, we have in fact two specific periods of when people retire. Men usually retire around the age of 60, the second [retirement] peak is at the age of 65, mainly for women as they often stopped working when they had children. What has been decided is to postpone the age of retirement in order to postpone these peaks and to have very quick savings. But this is a very short-term fix. The demographic pressure will carry on. Within five years, maximum, we will have to take further decisions. It is not the end, but the very beginning of decisions that have to be taken in France.”

France has one of the highest life expectancies in the world. According to figures from the Organisation of Economic Cooperation and Development (OECD), French pen-sioners currently claim retirement benefits for an average of 24 years for men and 28 years for women – a longer pension-drawing period than in any other developed nation.

“The main challenge [for France] is how to cope with future demographics,” agrees Tim Reay, Principal at Hewitt. “The social security system faces the same challenge as any other social security system.

Nevertheless, in France the birth rates are quite high. The birth rate is still about two children per woman, which is almost keeping the population stable. It is a problem of people living longer, which means they get their pension paid longer, together with the general problem of recent unemployment. The particular feature of the French labour market is that unemploy-ment is very high for younger people and also for much older people. I think almost half of people retiring in France are actually retiring from unemployment benefits. So, if they are made redundant they
have something like a social plan, which means they often get their unemployment benefit – which will be quite high – until they receive their pensions. France has one of the lowest proportions of 55-60 and
60-65 years old that are working. They also have very high youth unemployment. So unemployment is not very spread among the work force, it is very concentrated.”

The French social security sys-tem has been shaken strongly by longevity and the high unemploy-ment levels of almost constantly 8% in the last 30 years. About forty years ago there were four workers to fund a pensioner in the pay-as-you-go system, whereas today there are only 1.5.

The French pension system
French pensions are based almost exclusively on compulsory social insurance and provides retirement benefits to those with requisite contributions. The system is pri-marily funded by joint social contributions made by employers and employees and is managed by administrative councils composed of their representatives.The pension system in France is quite fragmented and mainly based on two pillars: the dominant regime, Le Régime Général, which covers the vast majority of employees in the private sector and almost 60% of the whole popula-tion; and the numerous complemen-tary schemes, which are also compulsory.

Le Régime Général is part of the social security and offers the opportunity to receive a full pension after 42 years of service. This can amount up to 50% replacement salary. Currently basic general scheme pension can be taken out from the age of 60 to 65. “If you start to work very early, you could have your full seniority before the age of 60, but you can't retire before the age of 60. If you reach your full seniority after 60, you have to wait for your full seniority before you can retire with your full pension.
You can retire with your full pension, or you can retire before you reach full seniority with reductions,” outlines Campana.

Complementary schemes, Gestion Paritaire, are managed by the employers and the employees. “The employers and employees get together and decide what can be afforded, what the contribution rate should be and how the pensions should be revalued. In theory, that all is decided by the employers and employees without the state involvement. In practice however, the state is quite heavily involved behind the scenes, because the amount of money is very high and also the complementary schemes are linked quite closely to the state schemes in terms of retirement,” explains Reay. Complementary schemes are arranged by economic sector (agriculture, commerce, industry etc.), as well as by job type. There are various complementary schemes in France.

“The two largest [however] are the scheme of the executives, which is called AGRIC; and the scheme for the non-executives which is ARRCO,” states Dorlipo. While the general regime is based on defined benefits, the comple-mentary regimes are based on defined contributions. Employees receive points in return for contri-butions. Reay makes clear: “The point has an annual value each year which is also politically determined. So at retirement you accumulate all those points and whatever the annual value is at retirement your points are converted into a pension at that rate. So you can see that over time you can balance out this system, by increasing the price of a point faster than you increase the annual value of it in pension terms, which has been happening.”

On average, collectively Le Régime Général and the complementary schemes guarantee a pension with a replacement rate between 70-75% of wages for average earners. The higher the salary is, however, the lower will be the replacement rate. “That’s a classical characteristic of a system based on average career”, explains Campana. “If you have a rather low earning, close to the social security salary of €35,000 [in France], you will get a replacement ratio of about 60% and this is decreasing with your level of salary. It can go down to 40% even lower if you are a very high owner.”

The French system is actually quite well managed in the sense that protections are done and it is not like many other social security systems which are just financed out of budget. But, warns Reay, it is very dependent on the demographic situation, it is very dependent on the number of contributors – and not just the birth rate, but also the unemployment rates as well.

According to a recent Reuters article, the shortfall in pension system will reach almost €72 billion by 2050 under the most favourable scenario, in which the unemploy-ment rate falls to 4.5% by 2021 and productivity rises by 1.8% a year.

“There are conflicting pressures,” states Reay. “In a country where up to now, pension provision has not been a company’s problem – where everybody knows that there is a reduction in pensions. All the companies say, ‘why is it our problem? We are paying people, they work for us, and then they get a pension accumulated, and if the pension is not enough maybe they should pay for it’. It is not like the UK or the Netherlands, where pensions are usually a company issue. It is not seen as a company issue in France.”

Third Pillar
Can the third pillar, which is currently very small, be therefore the solution for France? “I would consider the French market as a non-mature group pension market. It is estimated that it will increase by 10pc annually over the next 20 years. It will take 20 years, because the decrease of the state system will be continuous but will be low. More competitors will be in the markets (insurers, asset managers). It will be an interesting growth market,” believes René van Leggelo, international head of group pensions at Axa.
So far however, there has been no political mention about the third pillar and France still has a long way to make individual pensions significant. Van Leggelo explains: “The amount of pensions paid [out] by the base salary regime and complementary schemes is about €250 billion a year, whereas the third pillar amounts to less than €15 billion a year.” The weight therefore lies clearly on the compulsory first and second pillar pension provision.

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