Overhaul of the French Pension system

The news has seen ‘en masse’ demonstrations in the streets of France at the end of September with millions protesting against the proposed overhaul of the French pensions system. These recent demonstrations echo the 1995 protests which saw the right wing Juppé government backing down over its proposed reform to put an end to the generous pensions (“regimes spéciaux”) for staff working for state companies such as SNCF (national rail), or RATP (Paris metro).

Now due to the aging of the French population and the imbalance between the active working population and those who are retired, the French government is forced to reform the French pension system and confront the unions. After two days of strikes on 7 and 23 September and more strikes scheduled for October, the question on everybody’s lips is whether the government, already at its lowest in opinion polls following the Woerth affair (Eric Woerth, Secretary of State for Social and Labour Affairs is questioned for conflicts of interests implying him, his wife and Mrs Bettencourt, one of the richests tax payer in France), will be strong enough to see this reform through.

We have asked Emmanuelle Ries, solicitor and partner at in London, and Isabelle Raoul-Duval, avocat and partner at Marceau Avocats in Paris, both specialised in employment law and cross border issues, to give us a short overview of the pension question across the Channel.

•    The current rules on retirement age in France

The principle behind the French pensions system is that of solidarity between generations where the active generation is contributing for the previous one (“système de repartition”). Accordingly retirement contributions are mandatory and collected by various social security agencies of the state in charge of managing these funds (the CNAVTS and the ARCO for all employees, the AGIRC for the “cadres” (employees at executive or management level) and there are separate state agencies dealing with pensions for self employed professionals).

The British pension system is based on the principle of private pension schemes where both employee and employer contribute to a pension fund during the employment (“système de capitalisation”). The British state pension is therefore largely a secondary form of revenue  for British pensioners.

The French system is a contributory based benefit and the amount that an individual will get on retirement depends on the individual’s contribution history. As soon as employees are 60 years old and have paid contributions for 40.5 years (162 trimesters) they are eligible to get their full state pension. Full pension ‘retraite à taux plein’ is calculated by reference to the average salary over the best 25 years of contributions. In the general regime, a full pension is approximately 50 % of the average salary over the best 25 years of earnings. Before the age of 65, where the employee has not contributed for 162 trimesters, the ‘taux plein’ will be reduced by a coefficient of 1.25% to 2.5%.

Where employees have paid contributions for less than 162 trimesters they will nevertheless be entitled to take out their full pension when they reach the age of 65. Disabled employees or employees who have worked since before they were 18 years’ old can also retire at an earlier age on a full pension.

There are therefore two retirement ages to claim a full pension entitlement in France, an ‘early release retirement age’ of 60 if you have contributed for 162 trimesters and a ‘cut off date retirement age’ of 65 if you have not contributed for the requisite amount of trimesters.

•    The proposed reform and why it is so controversial

Under the proposed plans for reforming the French pension system, the ‘early release’ retirement age would be progressively raised from 60 to 62 by 2018. From 1 July 2011, it would increase by 4 months each year.

The duration of pension contributions will also be gradually increased. In 2003, it was decided that beginning January 2012 it would be necessary to make pension contributions for 41 years (164 trimesters) to be eligible to receive a full pension. This will be further increased over the next few years in order to ensure that the length of time during which an employee makes contributions and  the average duration of retirement remain proportional.

The government has had to face unions’ objections in the streets in September on two main aspects of the bill.

Firstly, by postponing the legal age of retirement , the reform is seen to be favouring “white collar” employees and ‘cadres’, who start working after their studies and who live longer, over  “blue collar” employees whose life expectancy is shorter (by seven years for men and by three years for women as compared to ‘cadres’ ) and who start work at a younger age.

The unions wanted the government to adapt the age of retirement to take into account the physical aspects of the nature of the job performed (“penibilité”), so that manual workers could retire earlier as their work would be harder to do for them as they got older and physically their bodies would need to rest earlier than those of non manual workers.

In order to avoid a discussion on penibilité for each type of job and profession (is it harder to be a teacher or a baker for instance), the government has proposed that employees could retire earlier if they were suffering from a 20% permanent disability following a workplace accident or illness. Bowing to unions pressure the government has recently announced that the qualification through permanent disability will be decreased from 20 % to 10%.

Secondly, the unions argued that women would be more affected by the pension reform than men since they usually have shorter careers mainly because they take time off to raise the children. At present, 3 women out of 10 have to wait until they reach the age of 65 years to be entitled to a full pension (as opposed to 2 men out of 20). Accordingly, raising the age of full pension entitlement from 65 to 67 will affect mainly women. Moreover at retirement the women’s pensions are less than those of men. According to the COR (Conseil d’Orientation des Retraites) the average men pension amounts to Euros 1,636 Euros per month whereas the average women pension amounts to Euros 790 per month and to Euros 1,020 Euros per month if they are entitled to a reversionary pension (i.e., part of their spouse’s pension after the death of the spouse).

The government has argued that for women who started work after 1966, their careers will be similar in terms of pay and duration to those of men. This is not quite reality yet as in France, just like in Britain, women currently earn 30% less than men  in comparable jobs. To counter the unions’ arguments that women are adversely affected by the proposed reform therefore, the French government is looking at passing a law to force companies employing over 300 employees to implement an equal pay policy. Companies failing to implement such a policy or failing to pay men and women according to the same transparent criteria would face fines up to 1% of their total annual wages.

•    What may happen next in France

The Bill went through the Assemblée Nationale (House of Commons) on 15 September and will be examined by the Senate (House of Lords) on the 5 October. The Chaiman of the Senate, Mr Larcher, is pushing for concessions from the government. The government for now is only prepared to offer some minor concessions as President Sarkozy has stressed that both the increase of the legal age of retirement and the age of the full pension entitlement are not negotiable.

The government will be keen to stand its ground on this reform at times when the country’s economic recovery is far from certain. In a global climate of budget cuts, it is very possible that this reform will go through.

Next on the agenda for the government will be tackling the deficit of the unemployment benefit fund. Those unemployed unable to find another job are entitled to receive unemployment benefit for up to two years. Unemployment benefit is very generous in France, representing about 57% of an employee’s past salary. It is also very difficult to find a job past the age of 50 in France so the government is seeking to introduce legislation to encourage the employment of older employees (jobs and pensions can be more easily combined, employers cannot dismiss employees because of their age and have to get their consent for such dismissals, higher social contributions are applied on retirement indemnities etc.).

© , November 2010

Please contact:

Emmanuelle Ries - Partner, Solicitor

DD +44 (0)20 7553 9938

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