Vive la revolution

Adam Cadle looks at how the French state pension reforms will affect employees

Writing about French governmental policy and the implementation of reforms always proves to be interesting, because history says that any change that threatens the traditional French way of life is likely to be met with strikes and protests across the country.

In line with many other European countries, France is experiencing ongoing changes in its pension system which will have a significant impact on employers and employees, both in the public and private sectors, as the state looks to implement plans to try and deal with longevity risk and pension deficits.

Nicolas Sarkozy and Prime Minister François Fillon passed a law in November 2010 which saw the legal retirement age in France pushed back from 60 to 62 years in a measure that will come into effect by 2018. Whilst there is a continuous review still taking place regarding the number of contribution years that one needs to have in order to obtain a full public pension, the French government hopes that these reforms will eventually ensure a degree of sustainability within the pension system, as the French Pay-As-You-Go pension system will be annually E50 billion in the red by 2020 if nothing is done.

When the pension reform bill was passed by the National Assembly last year, French citizens took to the streets en masse to protest. French Labour Minister Xavier Bertrand announced that an employee in the generation born in 1955 will have to work 41 years in 2012, 41 years and 3 months in 2013 and 41.5 years in 2020 in order to claim full pension benefits, with opposition arguing that the plan will put extra pressure on workers and the unemployed. The contract in 2003 agreed to increase the length of contributions but only if the age of retirement was maintained at 60 so many are displaying their discontent at the changes.

However employee awareness and state guidance have been highlighted as essential factors to be addressed in order to ensure that these reforms succeed.

“The greatest risk regarding the French pension system is not so much on the financial side, but the fact that a lot of people will be retiring in 40 years time and will be very surprised at how small their pensions are. Awareness needs to be increased,” says Edward Whitehouse, head of pension policy analysis at the OECD.

“Part of the reason for trying to make people retire a bit later is that it is one way of making their pensions larger. The French are currently
the most reliant on state income in old age with 85% of income being provided by the state, and 13% of national income being spent on pensions. Therefore with deficits increasing, the need to save for retirement yourself is a message that needs to be made clear by the French government.”

This is a point which is also shared by Sylvain Rousseau, pension and benefits director at Towers Watson. He comments: “As a result of the reforms, there is now an increasing awareness of people to take an interest in an additional pension in order to save. People now realise that the benefits that were available prior to the reforms will not be possible to obtain in the future.

Before the reforms workers were choosing to concentrate on salary increases rather than pension contributions. When in the future the employee will prefer to negotiate progressive increase in the contributions to create additional potential pension, the employers will be happy to offer it.”

Greater employee awareness surrounding pension savings also creates opportunities for the insurance sector and for employers to fund more into supplementary pensions and not just into the AGIRC-ARRCO system for executives (cadres) and non executives (non-cadres).

Heleen Vaandrager, regional sales director at Aegon Global Pensions emphasises that greater awareness is needed around the PERCO system (a long-term collective savings plan that can be set-up by companies). “Approximately 90% of French companies currently only participate in the compulsory PAYG occupational AGIRC-ARRCO pension system. However, it is expected that the 10% of companies who also provide voluntary PERCO funded pensions will see their numbers increase in the future. As the larger companies take the lead in offering their employees this important supplementary benefit, others will follow. More awareness needs to be created about the fact that supplementary pensions are the future (and that both companies and employees should start saving now).”

Current French pension developments are by no means the finished article. As longevity risk remains at the forefront of the government’s agenda, continuing reforms will have to be proposed in order to combat this. Life expectancy in France is much higher than the average of the OECD countries at 81.1 years. In addition, French people enjoy a significantly longer period in retirement compared to other OECD countries. Length of retirement is 22 years for men and 27 years for women in France thus adding further problems to the state pension system.

Florian Léger, actuary at the ISSA, points out that extended pension contributions will continue to increase. “The number of years spent in work and the number of years in retirement has to remain stable. The Conseil d’orientation des retraites is looking into this. Life expectancy is still increasing so if they want to maintain this ratio the number of contribution years has to be extended.”

It remains to be seen whether the French pension system will flourish under the reforms, but the general opinion among experts is that it should improve things. However, in no way will it be immediate, but rather a gradual step-by-
step process. It is important not to rush the changes through as “the most important thing is to have employees happy with their pension system,” says Rousseau.

For the long-term success of the reforms, change in attitudes towards older people is necessary. According to a recent OECD report, Pensions at a Glance 2011: Retirement-Income Systems in OECD and G20 countries, ‘employers, both public and private, must learn to see older workers as a real asset and avoid discrimination towards them, invest in their training and adjust labour market conditions and hours of work when needed’.

Of all the countries in Europe, one can say that France is probably the most keen to maintain ties with its past. The French are proud of the current Pay-As-You-Go system and therefore any amendments made under the reforms naturally cause a degree of panic, with many citizens fearing that all will not be the same. France’s pension regime is not as close to the government as it could be, due to the vast array of different funds in the AGIRC-ARRCO systems. Sarkozy's ambition to improve the welfare state system would be made easier if there was not such a vast network of pension funds.

France’s trade unions are the main hindrance to any controversial bill which Sarkozy wishes to pass in France. However in order to fund the state deficit had Sarkozy decided to increase taxes to try and make up this loss then there would have been a greater uproar within French society. Whilst France’s people may not necessarily agree with the reforms, they must realise that an update in the pension system is long overdue to target this pensions shortfall.

Written by Adam Cadle

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