French Social Security pensions are largely supplemented by compulsory national pay-as-you-go schemes (repartition), with a split between the managerial/professional group (executives) and the remaining employees (non executives). Over the years, the effects of demographic ageing, coupled with a decline in social contributions due to high unemployment, have led to a deep crisis of the schemes. Periodic reforms were intended to stabilize the national pension schemes in the recent years and a number of legal changes to foster supplementation by companies have been carried out.
According to the previous layouts of 2003 retirement reform, the number of contribution years required to qualify for a full pension at age 60 was increased gradually from 40 to 41 by January 2009, the pace of the rise being set at one quarter each year.
Moreover, the “Loi de Financement de la Sécurité Sociale” (LFSS) of 2009 enforces a number of financial legal changes in order to prompt employees in the public and private sectors to delay their retirement date. In this bill, retirement urged by the employer (once the number of contribution years for a full pension has been reached) will be forbidden starting from January 2010, the simultaneous benefit of a pension and a wage, which allows pensioners to continue working as employees on a wage base, is made easier and the increase rate of the Social Security pension for a retirement after the full pension acquisition date, named “surcote”, will grow from 3% to 5% per annum after this date.
The LFSS of 2009 also sets up a penalty of 1% of paid wages for companies below 50 employees which will not have settled a seniors’ employment focused agreement before January 2010.
The main Social Security system in France covers most employees of the private sector (71% of the total workforce). The other 29% are covered by special schemes (electricity, railways and the civil services). However, since 2005, several special schemes have been integrated or linked to the Social Security pension scheme in order to standardize the French retirement system.
A full-age pension is payable from the age of 60 on, subject to 161 quarters of contributions in 2009 (to be increased until 2012 by one quarter each year). Both men and women can get a full retirement pension at any time between ages 60 and 65 once they have accumulated the adequate number of quarters of contribution.
The pension paid is based on career earnings (the highest 25 years earnings are taken into account) and the total number of years of contributions. It can reach up to 50% of contributing earnings (Tranche A earnings) for a full career, “surcote” or other pension’s increases (increase from the bringing up of 3 children for example) not included.
The monthly upper earnings limit (Tranche A) for employees’ contributions is adjusted at least once a year and was increased to EUR 34 308 _ per annum on the 1st of January, 2009. Contribution rates for retirement and survivor benefits are 6.65% for employees and 8.3% for employers on Tranche A earnings. In addition, employers and employees contribute respectively 1.6% and 0.1% of their total earnings (“tranche A” and subsequent ceilings).
The basic Social Security system is supplemented by mandatory pay-as-you-go pension schemes organized on an industry-wide multi-employer basis. These schemes are organized on a basis of employee category, differentiating blue-collars and clerical workers (non executives) from professional/managerial personnel (executives). Most non executive schemes are administered within the ARRCO system, while the supplementary executive schemes are administered by AGIRC. Executives are required to contribute to both schemes (up to a different ceiling depending on the scheme). These schemes are contributory and full pension is normally payable from the age of 65 but the agreement named “Association pour la Gestion du Fonds de Financement” (AGFF) allowed a full pension payment from the age of 60 if the employee had contributed for the adequate number of quarters. The future of this agreement which ended on 1 January 2010 is being discussed between workers’ and employers’ unions and could have an important impact on supplementary pensions, would it be terminated.
Early retirement is possibly subject to a pension cut depending on the age of retirement and the number of years during which contributions were paid to the basic Social Security system. These supplementary systems use a sophisticated technique of revalued pension “points” to build up the retirement pension. Contributions are converted into “points” when they are paid and the retirement pension is calculated by multiplying the points accumulated over the career by the point value of the retirement date.
The financial position of the schemes is monitored by the adjustment of both the point value and the fraction of contributions paid which is actually converted into pension points. The scope of ARRCO and AGIRC reaches an earnings ceiling for contributions and rights depending on the Social Security ceiling. For AGIRC, the ceiling is eight times the Social Security ceiling and, for ARRCO, three times the Social Security ceiling for non executives and one time the Social Security ceiling for executives.
There is a standard rate for contributions attributable to pensions. For AGIRC, it is 16.24% of the wage and, for ARRCO, 6% of the wage on Tranche A earnings and 16% over that limit. However, the effective paid contribution rates are those rates multiplied by 125% – which is the effective contribution rate (taux d’appel des cotisations). Generally the employer pays 60% of those contributions and the employee pays the other 40%, although that sharing can change from one professional sector to another.
Retirement pensions, including the Social Security pension, usually amount to an average 60% of the final annual wage for a lower-paid employee (whose final wage is under the Social Security ceiling) – but a much lower percentage applies to higher paid managers (about 30% of his final wage, which is over eight Social Security ceilings).
Survivor pensions of 60% are payable from these supplementary systems from age 60 years for AGIRC and age 55 years for ARRCO. The survivor pensions can be paid from age 55 years for AGIRC, but with a reduced reversion rate.
Some special supplementary schemes exist for certain sectors of the economy (i.e. for employees of the public sector not being civil servants, IRCANTEC, …) or within companies. There size is yet very limited.
The market for company plans is still small – it represents about 5% of the retirement market in terms of contributions – but developing with recent products as PERCO (Plan d’Epargne pour la Retraite Collective), which is a collective funded scheme, and PERP (Plan d’Epargne Retraite Populaire), which is an individual and optional scheme (close to the individual 401k plans).
Traditional company sponsored defined contributions plans and defined benefits plans increase more slowly due to less favorable social contribution and tax regulations enforced by the 2003 Fillon retirement reform. Although the return rate of compulsory pensions decrease, the market finds it difficult to develop in the present crisis context where establishment of company plans isn’t on the priority agenda for employers.
Since the 1st of January 2004, employee and company contributions to mandatory pay-as-you-go arrangements are fully tax-deductible.
The 2003 Fillon law has altered the tax-deductibility of contributions to company plans which were generally almost fully socially and fiscally deductible. The exemption limits are more restrictive and have been differentiated between retirement and healthcare contributions (which were under the same tax frame work before this law). Moreover, the Fillon law creates specific conditions in order to benefit from these exemptions. Among others, a retirement company plan must be designed for well identified and employee groups, not individuals, it also has to be mandatory which are characteristics defined by regulator.
Pensions in the payment process are normally taxed in the same way as any other earned income, subject to certain minor cuts, and there are no specific tax incentives for lump sum benefits.
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