THE FRENCH RETIREMENT SYSTEM
I / Main characteristics and statistics on French pension system
General framework The first and second pillar : “the world of repartition” Optional coverage Assets of supplementary schemes Financial regulations
II / Reforms and news
ARRCO and AGIRC agreements The Council for pension orientation The reserve fund Law for companies savings plan
I / Main characteristics and statistics on French pension system
General framework of French retirement system
For historical reasons, the French retirement system is organised along occupational lines. It is further separated into categories of salaried employees and independent workers. There are actually several types of salaried employees in the public, semipublic and private sector. In the public sector there are many special schemes, and a single scheme often has a basic and supplementary function. In the private sector, there is a distinction between basic and supplementary schemes. The first pillar is composed of social security general scheme (CNAVTS: Caisse Nationale d’Assurance Vieillesse des Travailleurs Salariés) intended for non-farm wage earners, and covers the biggest amount of people and farm social insurance. In the area of supplementary schemes ARRCO and AGIRC cover the biggest number of wage earners. All wage earners, with the exception of those who contribute to IRCANTEC and some other special schemes, contribute to ARRCO. Only those with executive status contribute to AGIRC. IRCANTEC is reserved for contract public employees. The retirement system for independent workers is also divided into five occupational schemes. These are further subdivided in professional categories. Every independent worker benefits from a basic scheme but supplementary schemes are compulsory only for craftsmen and liberal professions. The system covers the entire population since, in addition to occupational schemes, there is a minimum old age pension for those without a certain level of pension.
The first and second pillars : the world of “repartition”
The basic schemes and most supplementary schemes are compulsory and financed on a pay-as-you-go basis. In 1998, around 22 million contributors were estimated. 18 million pensions were paid to 12 million pensioners (one pensioner can receive several pensions). Schemes are financed by contributions from employers and employees. Contribution rates as well as the share between employers and employees depends on the schemes. The table shows the rate of employer contributions for 1996 along with the share of pension covered. We can see that the employer share is considerable for certain schemes even through contribution do not go very far toward covering the total pension cost. Schemes with revenues exceeding their costs participate in cost equalisation system. This mechanism offset differences in the burden carried by schemes because of the different characteristics of the population groups they cover.
Schemes Employees of local communities Paris Public Transport National Railway Company Electricity of France Civil servants General scheme ARRCO (Average rate) AGIRC (Average rate) Charpin report - 1999
Minimum employee legal contribution 7,85 % 7,85 % 7,85 % 7,85 % 7,85 % 6,55 % 2,92 % 6,96 %
Minimum employer legal contribution 25,1% 15,34% 28,44% Employer contribution Employer contribution 8,20% on an upper earning limit/1,60% on the overall wage 4,38% 11,96
Real rate Proportion of pensions (employer and covered by contributions employee)* 33,1 % 22,3 % 38,5 % 63,6 % 51,7 % 17,0 % 10,0 % 24,7 % 150,3 % 35,3 % 33,5 % 106,7 % 113,7 % 81,8 % 99,5 % 91,7 %
* Real rate of contribution = Amount of contribution collected / Overall maximum earnings for contributions. This means that the calculated rate includes voluntary employer contributions.
The amount of benefits reached, in 1999, US$160 billion overall, with US$ 117 billion paid by the basic schemes and US$ 43 billion for the supplementary ones.
Pension benefits served by basic and supplementary schemes in 1999
(including survivor pensions)
Schemes CNAVTS MSA Benefits 57,912 53,475 4,437 45,340 26,826 1,426 5,587 1,920 2,652 4,142 640 969 396 244 535 13,251 2,780 1,841 526 58 7,821 223 395 395
Schemes ARRCO AGIRC Others Benefits 40,466 25,758 13,248 1,460
PRIVATE SECTOR Non-farm wage-earners Wage earners of the farming sector Special schemes of public sector Civil servant and military State workers Employees of local communities Mining industries Electricity and gas of France National Railways companies Paris Public Transport Sailors Clerks and notary employees Bank of France Others Self employed schemes Tradesmen and industrialists Craftsmen Liberal professions Barristers Farmers Clergymen Without occupational entitlement Old age minimum
CPCM FSPOEIE CNRACL CANSSM EDF-GDF SNCF RATP ENIM CRPCEN BDF
ORGANIC CANCAVA CNAVPL CNBF MSA CAMAVIC SASV
ORGANIC CANCAVA Supplementary occupational schemes CNBF
2,374 224* 417 1,679 53
Total 116,900 42,841 *Compulsory scheme for spouses, there is also a non compulsory supplementary scheme which served US$ 52 million in 1999. In million US$ (exchange rate of December 1999) Observatoire des Retraites -2000
2 types of schemes exist : defined benefit and defined contribution schemes. The aim of defined benefit schemes is to provide a pre-defined level of pension and contributions are adjusted to meet this objective. In the case of defined contribution, the pension is determined by the amount of contributions paid during a career. The first pillar is composed of defined benefit schemes as well as the special schemes of the public sector. Second pillar schemes rely on defined contributions.
First pillar Defined benefit
Second pillar Defined contribution (Point system for ARRCO and AGIRC) Defined benefit schemes
The general scheme (CNAVTS) currently offers a pension equivalent to a maximum 50% of the average salary of worker’s 17 most productive years. This will be expanded to 25 years by 2009. A full pension is served at 60 with a condition of 39 years of contributions (157 quarters). A person who doesn’t fulfil this condition may be permitted to retire at 60 with a reduced pension.
Average salary of the 17 years X Rate (equivalent to 50% for a full pension) X length of insurance 150
Pension for special schemes of the public sector are also based on defined benefits. The pension is linked to the level of salary and to the length of insurance with a maximum of 37.5 years.
Average salary of the last six months X Regulatory rate (2% per validated years).
Thus, the full pension (without bonuses) reaches the rate of 75% (2% X 37.5). The supplementary schemes are mainly defined contribution schemes, as well as ARRCO and AGIRC, although for the latter, they are converted into points. Every year, the affiliate buys points with contributions at a certain price. When he retires, points are cumulated and multiplied by a determined value in order to obtain the annual amount of pension. Legal retirement age: Since 1982 a private sector worker has been able to retire at 60 at the earliest and at 65 at the latest. For the liberal professions though, retirement remains at 65. In the public sector the retirement age is 60.
The number of pension funds based on an accumulation of capital are not very high. There do exist various possibilities for salaried employees to build up retirement savings however. Outside of the traditional forms of life insurance, most of these are group insurance contracts. In the private sector, such contracts are provided at the initiative of the employer. There are three types of arrangements : “Article 82” arrangements (named for that article of the French Tax Code) are life insurance contracts, collectively negotiated and offered as an option to some or all of a company’s employees. “Article 83” arrangements are group insurance contracts with defined contribution rates, provided to all employees of a firm or to a specific category of employee. These represent the most common type of company pension schemes by far. “Article 39” arrangements work along the same lines as a defined benefit scheme.
These arrangements are accompanied by fiscal incentives. It is estimated that 3.3 per cent of French households benefit from an occupational pension plan. In the public sector, employees enjoy options that bear a closer resemblance to pension funds. These are of three types : - PREFON, a funded scheme based on a point system, where the US$ 3.5 billion of assets are managed by the Caisse Nationale de Prévoyance. It is open to civil servants and contract public employees and offers fiscal incentives.230 000 people are affiliated (including 60 000 pensioners). - CREF created for and by teachers, enjoys the singularity of being a mixed system. Composed of two funds, the one is managed as a pay as you go way and the other funded. It is estimated that 400 000 persons are affiliated. - CGOS, intended for hospital workers, is an optional pay-as-you-go plan. Except for farmers, shopkeepers and factory owners, not many possibilities were available for independent workers until 1996. Since then, self-employed workers can subscribe to Madelin Plans. These are pension savings providing a retirement annuity. A person in this category can become voluntarily affiliated to a plan taken out by an occupational association with a life insurance company. There are two sectors where supplementary coverage is not compulsory, farmers and tradesmen. The farmers did have supplementary coverage but the scheme providing it was closed as a result of European court decision. Nowadays, such coverage is handled by insurance companies. An estimated 6,9% of the working and retired population benefit from a retirement plan in the public sector or as an independent worker. Insurance companies, trade-union welfare organisations, and mutual insurance firms are allowed to provide retirement savings plans.
Assets of supplementary schemes
Although many of the schemes are compulsory and managed as pay-as-you-go, a certain level of reserves is accumulated nonetheless through surpluses or economic variations. But, it remains rather small in comparison to the annual amount of benefits paid by the supplementary schemes (US$ 43 billion in 1999). The following figures include 12 supplementary schemes for private sector employees and independent workers.
Year 1999 ASSETS EQUITIES FIXED INCOME REAL ESTATE CASH & STP OTHER Domestic 33,983 8,629 20,255 3,609 835 655 Non Domestic 1,768 1,242 526 0 0 0 Total 35,751 9,871 20,781 3,609 835 655
In million of US$ - Exchange rate of December 1999 Observatoire des Retraites – 2000
We may note that funds are mainly invested in bonds (58% of the total). Equities represent only 28%, but they do represent the biggest part of foreign holdings (US$ 1 billion in 1999).
CASH & STP REAL 2% ESTATE 10% OTHER 2% EQUITIES 28%
FIXED INCOME 58%
Observatoire des retraites - 2000 Assets invested Other abroad but UE countries in not Countries Europe allocated by zone 193 165 0 0 0 370 306 0 0 0 161 39 0 0 0
EQUITIES FIXED INCOME REAL ESTATE CASH & STP OTHER
234 14 0 0 0
216 0 0 0 0
66 0 0 0 0
0 2 0 0 0 2
1, 242 526 0 0 0 1, 768
TOTAL 358 676 200 248 216 66 In million US $- Exchange rate of December 1999 - Observatoire des Retraites-2000
Data for externally funded insurance contracts was furnished by the Federation of French insurance companies. They include occupational arrangements and L.441.1’s of which Prefon is a part. Year 1999
"Article 83" arrangements "Article 82" arrangements "Article 39" arrangements L.441 Madelin arrangements Farm supplementary schemes
1,133 184 1,639 444 536 138
15,042 1,379 6,954 7,812 1,792 720
4,074 33,699 TOTAL In million US$ - Exchange rate of December 1999 - French Federation of Insurance companies – Annual report 2000
Financial regulation of investment
A part of funded occupational schemes, as well “Article 83” arrangements, follow life insurance rules, that permit wider investment in bonds. As far as compulsory supplementary schemes are concerned the situation varies according to the schemes, although the main holdings are in bonds. There are no stipulated rules for ARRCO and AGIRC as of 1994, but there are accepted standards which call for what investing. These are flexible enough to allow member funds to follow independent strategies of managing assets. For example, AGIRC and its institutions should invest more than 60% in bonds and ARRCO respects a minimum of 68% in bonds and no more than 25% in shares of which 5% a maximum going toward non Euroland holdings. The standards for ARRCO will change soon and the trend will be toward increase investment equities up to 45%.
II / Reforms and news
As in many countries, French retirement system will have to face an ageing crisis, doubled by uncertainties of economic growth. The Social Security General Scheme was reformed in 1993, and ARRCO and AGIRC (supplementary schemes) in 1996, but nothing has been done for special schemes of the public sector. There have been no important reforms this year, but change is in the air. A tricky debate on raising age of retirement is already underway and a long term approach to managing pension schemes has been introduced by the creation of the council for Pension Orientations and the reserve fund. Moreover, long term savings are encouraged through the adoption of a law for long term company saving plans.
Agirc and Arrco agreement.
Part of wider negotiation initiated by employers under the name of “Renewal”. ARRCO and AGIRC, the two main supplementary schemes for wage-earners of the private sector, are part of wider negotiations on social welfare, initiated by the employers’ organisation (Medef). After agreements concerning unemployment insurance and occupational medicine, a third one was signed on February 10, 2001, for Agirc, Arrco and ASF. ASF is an institution established in 1984 to pay supplementary Agirc and Arrco costs due to retirement at 60 and a certain type of pre-retirement. The ASF agreement, which normally expired at the end of 2000, had been extended for 3 months. If ASF is continued, it will post a sizeable surplus. Agirc is currently more or less in balance and Arrco is accumulating reserves. There is no problem for the moment, but troubles could occur as of 2010.
The negotiation proved difficult. Employers wanted to increase the age for retirement with a full basic pension. Employees retire today at 60 if have completed 157 quarters of contributions. Thanks to a 1993 reform, they will need 160 quarters (40 years) in 2003. Those who receive a full pension in the basic system, currently get a full supplementary pension. The employer union suggested an increase of one quarter per year from 2004 to 2010. As a result, 167 quarters would be needed with a minimum age of 61 plus three quarters as of 2010. This provoked a strong opposition from the trade unions who were refusing to modify conditions for retirement at 60 in the supplementary schemes. The employers reacted by refusing to pay contributions necessary to keep ASF alive. This meant the end to retirement at 60 and provoked a strong outcry and trade unions staged widely successful demonstration at the end of January. Negotiations began again and this time an accord was reached between employers and two of the five trade unions on February 10th. They agreed to the following ASF becomes AGFF. Formerly financed by contributions collected by the unemployment insurance agency, it will be managed by Agirc and Arrco and financed by a slightly increased contribution collected directly by the two federation’s member funds. AGFF will finance retirement at 60 and contribute to maintain Agirc’s and Arrco’s financial stability. The value of the pension point and the purchase price of a point will be adjustated each year in line with inflation. Agirc and Arrco move closer together and the two federation’s pension funds will be grouped.
This agreement is only good for a very short period, ending 2002. The government and the parliament are being requested to reform the basic pension system along the following lines by 2003 : Define and maintain a replacement rate for the next 10 years. Forego increases in contribution rates over the next 10 years. Favour length of career for a full pension. Authorise retirement before 60 for workers who began work early or who work in arduous conditions .
A limited and ambiguous agreement. Things will remain unchanged untill the end of 2002. But, there is still strong disagreements between social partners concerning the future of supplementary pension schemes.
The Medef views favouring the length of contribution variable to obtain full pension as the only way of maintaining financial equilibrium. They also feel the agreement opens the door to a universal pension scheme that would integrate the basic schemes and the compulsory supplementary schemes. At the beginning of the negotiation, they aimed to proposed to reduce managerial costs through reduction of the number of Agirc and Arrco pension funds and merge Agirc and Arrco or, at least, to group some services. But, the main trade-union signing the accord thinks that it merely offers workers with 40 years of contributions the possibility of retiring before 60.
Conseil d’orientation orientations)
The establishment of this council was established by Prime minister Lionel Jospin in a speech on pensions in March 2000. Its purpose is to assess the current financial situation as well as prospects for the different pension schemes. It will also determine financial conditions for maintaining financial equilibrium over the long term. The findings will be published in a report every two years along with recommendations for reform. Organisation. The council is composed of a chairman and 32 members appointed by the Prime minister. This includes politicians, pension experts, representatives of pensioners, Trade unions are taking part but not employers. The Medef (the employer’s association) considers the council is creating confusion concerning the role of the social partners in pension management (most pension schemes are jointly managed by employers and trade-unions). Functions. A working program has been adopted. The committee is to meet each month for hearings, discussion, and to order studies from the National Institute for Statistics, the Research Branch of the Social Affairs ministry, etc. Three working groups are studying: - Ageing workforce. - Diversity and inequality among pensioners - Forecasting. This group will be choosing different economic models and evaluating the consequences on retirement schemes. The pension schemes themselves will be involved in the task.
The idea of a reserve fund for retirement schemes was proposed in 1992 and put into practice in 1999. The Social Security Finance Act for 1999, that created the “Reserve Fund for Retirement”, conferred its management to the Old Age Solidarity Fund for which it serves as a second accounting section. Funds are presently invested in 2 year Treasury Bonds (OAT).
A temporary managerial organisation. The first project of Social Security Finance Act for 2001 forecast the establishment of a public body managed by a supervisory board including representatives of social partners and State and qualified personalities, a managerial board of 4 members and a general secretary designated by the government. The administration of this public body was made by the Caisse des dépôts et consignations. Funds could be invested in nearly every financial instruments. At the end, for legal reason, this question hasn’t been resolved by the Social Security Finance Act for 2001 and would be probably treated in a special law.
Objectives and resources. The Reserve Fund will come to the aid of basic schemes that were reformed in 1993 in order to reduce their future cost. Door isn’t closed to eligibility for the Reserve Fund to other schemes, such as the special schemes, but efforts to be made by these schemes are required. Revenues of diverse nature and origin have been affected to the Reserve Fund through the Social Security Finance Acts for 1999, 2000 and 2001, such as surplus net income of the general pension scheme (CNAV), a part of the surplus net income of the Old Age Solidarity Fund (FSV), a fraction of the company social solidarity contribution, the major share of sales revenues for mobiles telephone permits (UMTS)… According to the report of the Social Security Accounting Commission of September 2000, the funds of the Reserve Fund could reach 36 billion French francs at the end of 2001. This amount could reach US$ 8 billion with the sale of UMTS permits. The objective set by the Prime Minister is to reach US$143 billion in 2020. According to experts, the real amount to meet the needs at this moment are around US$718 billion.
Law for company savings plans.
Three types of company savings plans have been in use up to now ; Participation This plan, compulsory for companies with 50 or more employees, allows employees to receive a proportion of profits in the form of shares of their company or sums to be invested. These are blocked for five years, with some special exemptions. Intéressement (profit sharing). The second is voluntary. Objectives are decided upon such as cost-reduction, productivity increases, improvement of service, and so on, and workers receive compensation if they are reached. The workers have the choice of claiming their remuneration immediately (in this case, the sum is taxed as wages) or placing it in a company savings plan. Plans d’épargne d’entreprise (PEE) (company savings plans). The third type, called company savings plans, is also voluntary and established by a company agreement or by the employer. Workers can put their own money into the plan as well as proceeds received from profit-sharing within certain limits, and the company may add its own contribution up to a certain limit. The sums may be invested in shares of the company or a mutual fund. In the two latter cases, sums are blocked in the same way as for the first. Approximately 4.4 million workers (of 5.5 million workers covered) received and saved US$ 5 billion in 1997. In 1998, there was a total outstanding of US$ 33 billion accumulated thanks to the three systems in 1998.
The new law: two main objectives The new law, proposed by the minister of Finance, Laurent Fabius, aims to encourage long term savings and to increase the number of beneficiaries of saving plans, especially in the sector of small companies. Long-term savings: Plan partenarial d’épargne salariale volontaire (PPESV). The new plans are based on a voluntary membership. Deposits are blocked for at least ten years. Workers are allowed to transfer their funds accumulated in an another type of plan to a PPESV. After ten years, either they elect to continue the plan longer or withdraw with a lump-sum. To promote these plans, the ceiling for exemption for employer contributions from social and fiscal levies has been raised to a level comparable to that of previous plans. A PPESV may be established by a single firm or through an industry-wide collective agreement.
Increase the number interentreprises (PEI).
Due to a strong competition between companies offering saving plans, the system has developed mainly in large firms. But, by now, companies can be grouped in order to create savings plans, easing access to the market to small and medium firms. PEI can be established through collective agreement for a group of companies, or accepted by a two-third majority of workers in each company. There will be also wild-industry agreements. Other measures were adopted to develop saving plans - In small companies (less than 100 workers), employers could be included in the company savings plan. - Savings plan are now included in the legally compulsory annual negotiations. - Fiscal incentives for small companies which already have or establish in the next two years participation, intéressement and PEE. Among the other,relatively minor aspects of the law are provision for: - The publication of a saving plan leaflet for purpose information. - The possibility of transfer of the funds accumulated in a PEE, - Possibility of transfer money from savings plans to a time savings account.