THE PENSIONS TIME BOMB 

By Peter Johnson

The next few months will be crucial as Jean-Pierre Rafarin’s government put some flesh on France’s long-awaited pensions’ reforms. The discontent of the spring and the ugly demonstrations of the masses has to be put behind them as les français tackle their own version of the «pensions time bomb».

The formula for this pending disaster is one familiar throughout Western Europe where welfare systems were put in place after the second World War. Essentially the state pension provision is one where the working population (les actifs) pay the pensions of the retired population (les rétraités).

This was never designed to be a God-given right, but people have become comfortably accustomed to it (in the same way as the luxurious health French system) and whilst there was a healthy balance in terms of numbers of actifs being in excess of rétraités the system worked well, even achieving a series of positive balances in the late 80’s.

However,from the early 1990’s the system of répartition or «pay as you go» has come under increasing pressure as the balance of actifs to rétraités has changed with first the large percentage of unemployed (10% of the working population and more) reducing contributions and – more dramatically – the first signs of the post-war «baby boomers» coming to retirement (in the case of some professions as early as age 55).

France lives at present in precarious balance, but by 2050 there will be three times as many rétraités to actifs in the overall population. This is the «pensions time bomb».

Reform can take three forms, as Monsieur Rafarin’s government explained back in the spring: either people have to work longer, or benefis are reduced, or contributions have to increase. Or a combination of the above.

It seemed at times, as the French «manned the barricades», that this simple message wasn’t getting through; indeed, Alain Juppé’s attempts at promoting such reform had seen his government topple in 1997. After all, none of the above measures are likely to be popular.

To add fuel to this particular fire, the vast numbers of French civil servants (fonctionnaires) were especially aggrieved to see their own comfortable pension regimes come under scrutiny. The government say they have to come into line with the private sector and abide by the same rules.

So, what measures have been introduced? First: longer working careers, so that to retire on a full state pension everyone (civil servants too) will have to work a full 40 years. Second: the government will introduce more opportunities for companies and individuals to set up funded private provision to take the burden off the state system (in other words, instead of Monsieur Dupont’s entire pension contribution going straight into the pocket of Messieurs les Rétraités part of his money will be earmarked for his own personal fund, which will be conservatively invested to provide long-term benefits). Already most profession liberales in France benefit from such a regime under the incentives offered by the inspired loi Madelin, whereby pension contributions are afforded a tax-deductible status as a genuine business expense. This will be one of the themes for the whole working population in the future. Third: (and whether one likes it or not!) the benefits of the rétraités in the future are bound to come down. At present a middle manager (cadre) with a full career could retire on 60% of his final salary, but by 2020 this could be as little as 40% .

The French reforms will to a large extent mirror those that took place in the UK 20 years ago, but one hopes that Monsieur Rafarin will take note of the problems encountered outre Manche.

Scandals have reared their ugly heads in two particular guises: corporate misuse of earmarked pension funds (viz. the notorious Mirror Group and Robert Maxwell case) and – in recent years – the whole issue of pension misselling, whereby greedy salesmen have advised people to invest their pension contributions into mainly equity-based investments, which of course have followed the stockmarkets into an alarming downward spiral. It’s great to hit a bull market when you approach retirement, but pity those that reached the magical retirement age only to find that 30% of their money had disappeared!

What advice to offer in the next few months: first see what measures are going to be made available in concrete terms (these will be announced soon); second take professional advice (after all, you wouldn’t go to see a doctor or dentist without making sure they were qualified; ditto with financial advice: make sure the advisor is regulated and qualified!)

And third: be realistic! The French have left it too late and the coffers will empty out, however quickly the current measures are introduced. The time for action was 10 years ago when visionaries such as Alain Madelin needed to be listened to rather than mocked. As ever with the French: plus ça change plus c’est la meme chose!