Expensive, outdated, unequal and above all unsustainable … This is how the French qualified their pension system during a survey carried out by Ifop in October 2018 on behalf of the liberal think-tank Fondapol. Since then, their opinion has not changed, and the fear of seeing the system disappear has even increased among young workers who anticipate receiving nothing from the state for their future retirement.
“We often hear the expression” the boxes are empty“. This clearly shows the ignorance of the pay-as-you-go system since most of the pension systems work today thanks to a mechanism of inter-professional and intergenerational solidarity “, recalls Philippe Goubeault, CFO of Agirc-Arrco, the complementary scheme for private sector employees. The key principle of this system? Active workers contribute to old age insurance and this money is used directly to pay retirement pensions, so there is no need to be funded in funds.
This scheme worked very well when the number of workers was much higher than that of retirees. But for the past few years, it has stymied every economic crisis and rising unemployment. It also shows its limits, given the aging of the population. The figures are hardly reassuring. At the end of 2017, France had 16.2 million retirees for 27.54 million working people. But this ratio of 1.7 should deteriorate sharply in the future to reach only 1.3 by 2070, according to the Pension Orientation Council (HORN).
Consequently, the net pension relative to income would vary between 42 and 49% in 2070, compared to 66% currently. Concretely, if retirees residing in France today receive on average around 1,547 euros net per month and display a standard of living slightly higher than that of the whole population, this will not be the case in the years to come if no further action is taken.
This observation is not without worrying the assets, already widely used to finance pensions. On average, 31% of their gross income is deducted for this purpose, notes the COR! However, their contributions are no longer enough to keep the system balanced. 20% of resources come from other taxes, public debt, money transfers (from unemployment insurance or the family branch of Social Security) or from the reserves of certain funds. Under these conditions, the French can wonder if their contributions are used wisely.
A complex system with 42 different regimes
Difficult at first to answer this question as the French pension system is complex. An employee must contribute to the basic plan and to a supplementary plan (except certain officials who donate to only one organization). In total, there are 42 different schemes with their own operating rules. “It is difficult to grasp what a contributed euro generates in pension rights”, warns Mourad Bentoumi, director of the French retirement department of the Willis Towers Watson group, an international consulting firm.
The general public knows a few funds, such as the Cnav (National Old Age Insurance Fund) which deals with basic retirement, the Agirc-Arrco for the supplementary retirement of executives and employees or the Social Security of the Self-Employed ( ex-RSI) which is responsible for business leaders or autoentrepreneurs. But a multitude of other structures complete this panorama: some specific basic schemes (for farmers, liberal professions or even lawyers) and many additional compulsory schemes.
Among them, some are intended for civil servants, such as the RAFP, which presents itself as the only pension fund in France, with a funded system. Others are linked to particular professions, such as the pension fund for doctors, that of notaries, pharmacists… In addition to this inventory, special diets, such as those of RATP agents, SNCF or minors.
Problem: some are structurally loss-making and largely subsidized by the state (typically, special schemes) while others still have significant reserves, but which could dry up in the future.
Consequence of this fragmentation of the system: there are large differences between the different structures. Administratively, a young retiree will generally have to wait several months to receive his first pension for his rights from the basic schemes. On the other hand, it will only take a few weeks to obtain it if he is affiliated to a professional supplemental plan. The smaller cases being less stressed, they can be more reactive. They are also more rigorous in their calculations while errors are frequent on the part of large structures. This is the case of the self-employed scheme, whose mismanagement of rights and benefits has regularly been pointed out by the Court of Audit these last years.
In this context, a Frenchman, affiliated on average to three different regimes during his professional career, must be vigilant about his rights. This is all the more true for hectic career paths. “Do not hesitate to start checking your retirement rights from the age of fifty. The longer you wait, the more difficult it will be to find the documents that will prove your career states ”, warns Marilyn Vilardebo, president of the retirement consultancy company Origami & Co.
Also in terms of financial management, the disparities between the funds are significant. Thus, basic diets have become poorer over time. “The pension branch of the general scheme saw its technical result sharply deteriorate in 2005. Its deficit even peaked at 9 billion euros in 2010. The phenomenon was at the origin of the last major pension reform, in 2010 , with the raising of the starting age by two years “, recalls Thomas Gagniarre, accounting and financial director of Cnav.
The general system does not hold any reserves since the contributions are directly deducted and managed in the short term by Acoss (Central Agency of Social Security organizations) and the Urssaf networks (Unions for the collection of Social Security contributions and family allowances ). “The Cnav only calculates pensioners’ rights and pays out pensions, requesting the necessary cash from Acoss on a daily basis”, adds Thomas Gagniarre. And when there had been surpluses, in the early 2000s, the State had also taken them away to entrust them to the Pension Reserve Fund (FRR, see box).
This total absence of a kitty is however exceptional. Most supplementary occupational schemes have been able to take unpopular decisions, such as raising contributions or not revaluing pensions during difficult times, unlike basic or special state-subsidized schemes. An unbalanced situation which now pushes the Government to reform the pension system by wanting to create a new universal plan, according to the recommendations of the Delevoye report.
This is not without generating a stir in the surplus funds. “For seventy years, we have managed prudently and responsibly and have built up reserves, sometimes requiring sustained efforts from both our contributors and our retirees. Also, we cannot accept that our reserves are pooled for the benefit of those who would not have made the same sacrifices “, argues Béatrice Creneau-Jabaud, president of the CPRN (Provident and Retirement Fund for Notaries) and of the association Pro’Actions Retraite which brings together several funds of liberal professions.
But are the reserves well managed? Not sure, according to several reports published in 2013 by the General Inspectorate of Social Affairs (Igas). This authority noted some errors on the part of professional pension funds which sometimes took excessive risks on the markets, or showed flaws in the procedures of control of their investments. The state wanted to put these practices in order by issuing a decree in 2017 in order to more strictly regulate their financial management. Alas, this text was postponed by the Council of State. However, some funds have complied with these new rules while others continue to take some liberties.
Long-term financial investments
However, this does not mean that their financial management is of poor quality. “The new rules for the investment of pension funds are partly excessive, by assimilating their financial management to that of life insurers. Their time horizon has nothing to do with it. “, nuance Vincent Puche, president of the consulting firm Insti7. Unlike a life insurance policy which can be liquidated at any time, retirement investments are used only to honor long-term commitments. Pension funds have an average of fifteen years before them before having to pay a pension. They can therefore take more risks on the financial markets.
According to the latest report from the French Association of Institutional Investors (Af2i), pension and provident funds held an average of 22.6% of the shares in their financial portfolio at the end of 2018, i.e. a much higher ratio to that of insurers (9.3%). However, this average conceals significant disparities between the structures. The notaries’ fund thus holds more than 40% of shares, against only 30% for Agirc-Arrco.
Despite everything, all pension funds respect several basic principles from which savers could draw inspiration. First, they regularly review their investments to make sure they always match their investment horizon. If they do not change their major strategic directions every year, they change their portfolio by a few percent depending on market conditions. Like most investors, pension funds are currently worried about low interest rates, leading them to move away from bonds and look for asset classes that are still profitable. They are increasingly diversifying their investments into less liquid investments, such as real estate or unlisted.
“Diversification must remain the watchword for any investor portfolio today. Other important parameters: pay attention to the point of entry into the markets and the management fees ”, sums up Yves Chevalier, member of the FRR’s management board. Reducing management costs is a priority today. “As of 2019, we have set an annual ceiling for financial management fees of 0.13% of the total outstanding amount managed, whereas in the past, they reached 0.25%”, comments Philippe Goubeault, on behalf of Agirc-Arrco.
Smaller pension funds, like savers, have less flexibility in this area. “Unlike the large retired investors who can obtain economies of scale thanks to the mass of capital they place, we prefer the quality of conviction management, even if it means paying a little more. This approach translates into performance superior to index management ”, explains Jean-Paul Muller, director general of the CPRN.
To ensure the best results, pension funds, which generally use management companies to invest their reserves, are quick to compete. A principle that all investors can apply.
Financial management of four plans under the microscope
Agirc-Arrco, reserves that make up for the deficit.In 2019, the Agirc-Arrco accounts will be approaching breakeven. But the federation of complementary retirement of the executives and the employees knew a difficult decade after the economic crisis of 2008. It had to fill a deficit of 37 billion euros over nine years between the contributions received and the benefits provided. “But, thanks to the improvement of the plan mechanism and to the financial products resulting from our investments, we have not started our capital since the amount of our reserves is today slightly higher than in 2007”, recalls Philippe Goubeault, its financial director. In 2012, Agirc-Arrco achieved a financial performance of 12%, but also sometimes posted negative results (4.6% in 2018). Its rule is to invest 30% in equities and 70% in interest rate products (bonds, money).
Amount of reservations: 79.7 billion euros. Ten-year annualized net financial performance: + 4.3%. Fees for managed assets: 0.13%
The Ircantec, a socially responsible portfolio.The Ircantec (agents not holders of the State and local authorities) is managed by the Caisse des Dépôts (CDC). The latter collects contributions and pays the pensions of all the plans under its supervision (CNRACL, RAFP, etc.). But, for Ircantec, it also provides financial management. Its portfolio (54% bonds, 38% stocks, 8% real estate) has the particularity of being socially responsible. In addition to generating performance, investments must comply with environmental or social rules. “For example, we have excluded coal from our portfolio and reduced the weight of fossil fuels. We also encourage investments that aim to fight global warming ”, illustrates Vincent Delsart, director of investments in the retirement and solidarity department of Caisse des Dépôts.
Amount of reservations: 11.8 billion euros. Ten-year annualized net financial performance: + 4%. Fees for managed assets: 0.12%.
CPRN, real estate management. The Notaries’ Provident and Retirement Fund (CPRN) has 11,000 contributors for 8,000 retirees and dependents, but has well-stocked reserves. A structure that knows the specificities of the profession of notary, it can easily adjust the regime in the event of an economic crisis. At the end of 2018, the Caisse held 40.4% of bonds, 41.3% of shares and the balance in real estate. If it delegates a large part of its outstandings to management companies, it also places it directly on the markets. It has 200 million euros of shares, mainly made up of large French stocks that pay dividends. “We manage this portfolio as a ‘good father’, that is to say avoiding a high turnover of securities”, comments Jean-Paul Muller, its managing director. The CPRN also takes direct charge of its real estate portfolio worth around 500 million euros.
Amount of reservations: 2.8 billion euros. Ten-year annualized net financial performance: + 5.34%. Fees for managed assets: 1.2%.
Social security for the self-employed, in full transformation.Widely criticized for its poor management of contributions and benefits for craftsmen and traders, the Social Security Scheme for Self-Employed People (RSI) has been replaced since January 1, 2018 by Social Security for Self-Employed Workers. A first step towards integration into the general scheme since, from 2020, the management of pensions will be entrusted to the Cnav while the sickness activity will be transferred to Acoss. Pending the directions that will be taken during the next pension reform, the plan places its reserves mainly in bonds (46.9% at the end of 2018) and in stocks (32.1%). Its net performance is satisfactory, at 4% annualized since its creation in 2006. However, its financial balance remains fragile, the status of self-employed being subject to economic uncertainties and regulatory developments.
Amount of reserves : 18.8 billion euros. Five-year annualized net financial performance : + 5.2%. Managed outstandings fees : not disclosed.