Towards a New Pensions Settlement

The International Experience

Gregg McClymont, Andy Tarrant, Tim Gosling

• Publisher: Policy Network
• Year: 2020
• ISBN:
  9781786612861
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Social Policy
• Index: Politics & International Relations

Delivering a stable income in retirement should be the primary focus of any workplace pension system. This is notably not the case in most Anglo-Saxon countries, including the UK, which has recently undergone a retirement income market liberalisation. This volume is the third in a series looking at pension systems from a comparative perspective. The series aims to promote greater understanding of what works and doesn’t work in pension system design, and considers a range of political, economic and cultural factors when explaining different national approaches. This volume explores how successfully defined contribution pension saving systems can deliver a decent retirement income for low- and middle-income earners. With contributions from academic experts and practitioners from around the world, this volume considers pension systems in Canada, Chile, Denmark, France, Germany, Greece, Indonesia, Switzerland, and the UK.

The French pension system

Christophe Albert and Anne Lavigne

The French pension system is often depicted as complex and fragmented but participation is actually quite straightforward for all citizens. The system is basically composed of two major pay-as-you-go schemes, the general first pillar basic scheme – Régime général or CNAV (Caisse Nationale d’Assurance Viellesse) – for most wage-earners working in the private sector (representing 60–70% of the labour force), and the public pension scheme that applies to civil servants and military personnel (representing about 15% of the labour force). The apparent complexity arises from the existence of similar sector specific schemes for particular groups of workers including agricultural and self-employed workers, and special schemes for workers in state-owned companies. For private-sector employees, the first-pillar pay-as-you-go scheme is complemented by a workplace pay-as-you-go point-based scheme. In the worldwide landscape of pension systems, France is thus characterised by its high level of coverage provided by the state-managed pension system and its very low level of pension funding, either at the individual level or at the workplace level. Current reforms are likely to change the defined-benefit nature of the system, but the overall pay-as-you-go dimension of the system will remain, with little room for private sector defined contribution pension schemes at the workplace or personal level.

The high level of state pension coverage

The first-pillar basic scheme provides a guaranteed annual income in retirement to all private sector wage-earners¹. At retirement, a retiree receives a pension proportionate to the years of contribution and to a reference wage. The full-rate basic pension entitles claimants to up to 50% of their reference wage; it can be obtained either at age 62 with a contributory record of 41.5 years for the generation born in or before 1955 – although the contribution record will progressively increase up to 43 years for the generations born after 1972 – or at the age of 67 regardless of the contributory record.

Two complementary pay-as-you-go schemes provide additional pensions for private sector employees that top up their basic pension. ARRCO² (for all workers) and AGIRC³ (for executive workers) schemes are mandatory and managed by the social partners (i.e. the trade unions and employer representatives). Contributions to these schemes enable workers to buy points throughout their career. The purchase price of a point is set by the scheme and determines how many points can be bought in exchange for yearly contributions; the service value of the point determines the level of pension derived from the amount of points accumulated by the time at which retirement takes place.

An equivalent two-pillar structure – sécurité sociale des indépendants⁴ – exists for self-employed workers, with the same rules applying to the first-pillar pension as in the régime général and complementary points-based pensions provided by a wide array of dedicated professional schemes.

The public sector pension scheme is integrated, meaning it provides both a basic and a complementary (occupational) pension. It covers military personnel and civil servants in central, local and hospital administration and provides guaranteed annual incomes. Some civil servants receive, in addition to their index-related salary, an additional pension outside the integrated pay-as-you-go scheme, in a mandatory fully-funded pension fund (Retraite additionnelle de la fonction publique or RAFP⁵). A civil servants’ pension at full rate equals 75% of the last six months’ salary, but the RAFP scheme only represents a very small percentage of their pension income.

Since the early 1990s, France has experienced four main substantial reforms of its first-pillar basic pension schemes. These took place in 1993, 2003, 2010 and 2014. In addition, several agreements between the social partners in second-pillar occupational schemes also took place, the last in 2017, which have also effected important changes. It should be noted that in 1995 the right-wing government of Alain Juppé was confronted by a massive public protest which forced it to drop planned moves towards a fully-funded third pillar scheme.

In a nutshell, the reforms to date have reduced the generosity of the first-two pillars of the French system in the following ways, by:

• increasing the length of the period of contributions needed to receive a full basic pension, from 150 quarters before 1993 to 172 quarters for the generation born in or after 1973;

• calculating the reference wage in the basic scheme on the best 10 years before 1993 and progressively extending the period to the best 25 years (by one year for each generation born between 1934 and 1948), truncated to the social security ceiling (whose level roughly amounts to the mean wage);

• indexing pensions (and wages for the reference wage) on CPI (Consumer Price Index) growth rate instead of nominal wage growth rate;

• increasing the minimum retirement age from 60 to 62 and the retirement age for full-rate pension from 65 to 67;

• decreasing the internal rate of return of the complementary schemes by raising the purchasing price of each point, thereby reducing the service value of each point; and, requiring extra contributions giving no points as well as temporary reductions in pensions in cases of early retirement.

As an illustration of these changes, we set out below how one specific generation has seen its rights evolve between 1992 and 2010, with no less than six different rules from ages 40 to 60 – including four reforms between the ages of 56 and 59.

Public spending in the French pension system (including complementary pay-as-you-go schemes) amounted to 13.8% of GDP in 2017. The average net pension of retirees living in France (including family bonuses and survivor’s benefits) represented 65.3% of the average earnings of the working population. When all other sources of income are considered (homeowners’ imputed rents excluded), the average living standard of retirees is 6% above that of the whole population and more or less equal to the level of employed people.

In 2015, the median living standard of retirees was equal to €1,770 per month. One retiree out of 10 had a living standard that was inferior to €1,090 (slightly above the poverty threshold). As a consequence, France has a relatively low level of poverty amongst retirees compared with other countries.

The net replacement rate over the lifecycle (defined as the ratio of the average pension during retirement to the average career earnings) is projected to decrease from 74% for a middle-class worker in the private sector born in 1940 to 60% for the same representative worker born in 2000 under the assumption of a 1.3% long term productivity growth rate.

A system with nested contributory and non-contributory benefits

The French mandatory pension system provides a fairly good coverage of the population’s needs at retirement, especially for low-to-middle income earners. Two elements contribute to this situation: the contributory component of the (defined benefit) basic scheme and of the (defined contribution) complementary schemes on the one hand, and the redistributive components of both schemes on the other.

Non-contributory elements are included in ‘contributory’ pensions: for instance, periods of unemployment are both included in contributory records for basic schemes and converted into points for complementary schemes. The same goes for illness, disability, and maternity periods. Credits are also available for parents who leave their jobs to educate their children and may be discounted for the purposes of calculating the reference wage under the Régime général rules.

Apart from these effects, inadequate contributory pensions can be complemented with a minimum pension (so called minimum vieillesse), which amounts (monthly) to €850 for single people or €1,300 for households.

The combination of contributory and non-contributory benefits makes it difficult to distinguish the proportion of pension benefits due to redistribution. The figure of 20% of pension expenditure (survivors’ benefits excluded) due to non-contributory elements is frequently cited, as evaluated by the statistical department of the ministry of social affairs (DREES).

Coexistence of numerous schemes

In 2016, two-thirds of total pension payments were accounted for by pensions of wage-earners who had previously worked in the private sector (if one also includes the schemes for agricultural workers). Within these two-thirds, the point-based schemes were originally designed to generate a pension that was roughly half the size of the pensions paid by the basic schemes. For public servants, basic and complementary pensions are integrated and served by public schemes under the same rules, whether affiliates are working for the central state administration or with local and health institutions, even if the schemes differ somewhat in their financing. Many special schemes exist for salaried workers in specific public administrations (e.g. in energy and transportation), although this only represented 5% of total pension expenditure in 2016 (see table 4.1). The remainder of public pension spending is devoted to self-employed workers under different schemes linked to the specific nature of their work.

Information documents stemming from a pooling of the 35 main French schemes (among 42 known schemes) are available to affiliates reaching 35 years of age (for career duration information) or 55 years old...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Contents
• Acknowledgements
• Introduction: Pension systems fit for pensioners: The international experience
• Canada’s retirement income system: Its strengths and weaknesses
• Chile: The retirement income system
• The Danish retirement income system
• The French pension system
• The German pension system: Defined contribution begins
• The Greek pension system and the role of DC schemes in recent reforms
• The Indonesian pension system
• Switzerland: The pension system
• UK: First steps in allowing collective DC
• Conclusion
• About the authors