A different look

Peter Davy explains the reasoning behind France’s unique approach to pension reform

The economy might be looking up, but as French President François Hollande faces la rentrée after the summer break, he faces some old problems and principle among them is pension reform.

The protests were booked even before the details of proposals for reform were clear. Prime Minister Jean-Marc Ayrault met with unions and employer representatives in the last week of August; CGT, the country’s second biggest union and a key player in protests over reform back in 2010, had street demonstrations scheduled for 10 September. The Force Ouvrière trade union is also opposed. Leader Jean-Claude Mailly warned in a recent interview with Le Figaro that pensions would be the biggest source of contention in the next six months.

“Tension with the government is inevitable,” he said.

Whether the reforms warrant such opposition, however, is open to question.

A poor start
Certainly Hollande is not the most obvious target for union anger over pensions. Last year, he partially reversed the reforms that prompted such bitter protest in 2010 – restoring a retirement age of 60 for those who started working early in life, mothers with at least three children and the older unemployed – at a cost of €3 billion a year by 2017.

That surprised those in other countries, where governments have been pressing ahead with rising retirement ages to tackle increasing longevity.

“Shifting back the state pension age was quite astonishing, given the pressures on the French economy and society and when every other nation is pushing forward,” says international law firm SJ Berwin pensions partner Wyn Derbyshire.

The present reforms, aimed at tackling state pensions deficits forecast to reach €20 billion by the end of the decade, will represent a shift in the right direction, but they are still likely to be limited in scope.

As early as June, with negotiations barely underway, Hollande ruled out a rise in the retirement age from 62, and indicated he would not tackle the preferential treatment enjoyed by public sector pensioners. His preferred approach – to increase the paying-in period to qualify for a full state pension to 41.5 years – is likely to be introduced only gradually from 2020 or 2025. In the meantime, it looks like the sole contributor to narrowing the deficit will be increases in the taxes on companies, despite the EU Commission’s calls in May to tackle the pensions deficit without putting additional burdens on French employers, who were already struggling to remain competitive.

At economic consultants Asterès, director Nicolas Bouzou says France is now trailing almost everywhere in Europe, when it comes to reform.

“The German and Scandinavian countries made reforms to pensions, the labour market and education before the 2008 crisis; the Southern European countries, notably Spain and Portugal, have made reforms because of their sovereign crisis; France has not,” he says.

“Hollande is not a reformer,” he adds.

Little by little
In fact, this might be a bit unfair – if not to Hollande, then to France.
Despite often being lumped together with other continental countries facing severe problems in their economies and retirement systems, France is better off than many, according to the LSE’s Centre for Analysis of Social Exclusion, visiting research fellow, Aaron George Grech.

That’s partly down to demographics: birth rates in France are about 20 per cent higher than in Germany. On EU figures, Germany’s population will decline by 15 million by 2060; France’s will grow by nine million. Nor is the French pensions system that generous. Much, for example, has been made of low retirement ages in France, but that ignores the penalties involved.

“The French have the lowest pension age on paper in Europe but it is just the earliest figure at which you can get a pension. It doesn’t mean you get the full pension at that age.” In fact, both men and women in France can retire at 60, but have to wait until age 65 for a full pension, rising to 67 by 2018.

The average pension is 60 percent of post-tax income, against a 69 percent average for industrialised countries.

The intermittent strikes and protests over pensions, not just in 2010 but earlier in the previous decade during reforms under minister of social affairs François Fillon, have not been entirely without cause.

“People always ignore how much France has reformed,” says Grech. Back in 2001, he points out, when the European Commission began its forecasts of pension spending as a proportion of GDP, French expenditure was expected to increase by 3.6 per cent by 2040. Today, it’s 0.5 per cent by 2060, against a 1.5 per cent European average and 2.6 per cent in Germany.

“It really has done a lot to adjust the system.”

So why the European Commission’s dire warnings in May? It called for “urgently needed” policies, with commissioner for economic and monetary affairs Olli Rehn even hinting the Commission might use new EU powers, including fines, to compel reform.

Partly it’s a proxy for concerns about the French economy generally, suggests Grech. Although the country emerged from recession to grow 0.5 per cent in the second quarter, the economy faces significant challenges, including unemployment that hit a new record of 11 per cent in June and is expected by the International Monetary Fund to increase to 11.6 percent next year.

It also does face that significant pensions deficit of €20 billion in 2020, while the proposed reforms’ aim to tackle about €7 billion, which is the part of the estimated deficit in the general regime only (with France also having a number of complementary schemes in different industries). Even that might be too hopeful.

“The deficit numbers are probably an underestimate because they are based on optimistic assumptions in terms of underlying economic growth and unemployment rates,” says OECD senior economist and head of the French desk Hervé Boulhol.

Added to that, pensions spending in France remains significantly higher than elsewhere: over 13 per cent of the GDP in 2011, against 7-8 per cent in the UK, and accounting for 26 per cent of the total public expenditure for the same year, against less than 16 per cent in the UK. And despite this, it provides wildly different outcomes, with the complexity ensuring some workers, such as those in the public sector, do much better than others.

This, again, explains some of the continuing calls for reform. The OECD, for example, would like to see a universal pension scheme – “systemic reform that would not only increase transparency but would be fairer and enable labour market mobility between public and private sectors”, says Boulhol.

“It is not just about budgets.”

Plus ça change…
This kind of systematic reform, however, will certainly not result from the current proposals – no matter what happens in the weeks ahead.

According to the University of Reims’ Anne Reimat the financial crisis has had a “catalytic effect” in France, highlighting weaknesses of the pension system. But, despite this, proposals on the table are “parametric” – just as earlier reforms.

“They don’t change the structural functioning of the whole system – mainly public, financed through mandatory social contributions and pay-as-you-go, based on the employment status; they only change the level of social contribution, the age of retirement, the length of the career necessary to obtain a full pension, and so on,” she explains.

No structural changes seen elsewhere, such as the introduction of notional accounts or big increases in the share of private funded pensions, which account for less than 4 per cent of the value of French pensions, are likely.

“Indeed, despite the difficulties, there is still a consensus to maintain the current system in this state, or, more exactly, a consensus that the political and economic costs of changing the system seem too high,” says Reimat.

Given that, it’s hard to disagree with the unions on one thing at least: pensions will remain a source of contention in France for some time to come.

Peter Davy is a freelance journalist

    Share Story:

Recent Stories

Mitigating risk
BNP Paribas Asset Management’s head of pension solutions, Julien Halfon, discusses equity hedging with Laura Blows

Europe’s pensions challenges
Francesca Fabrizi meets Matti Leppälä, Secretary General and CEO of PensionsEurope, to discuss the key aims and objectives of the association today.