The new law has passed most legal hurdles, but is the demand really there? Gilles Pouzin reports

Social unrest has not stopped the introduction of France’s new private retirement system, but the new law has not yet won its battle either. After its second parliamentary approval on February 20, the pension funds act had been stopped by the socialist group in the Senate for constitutional examination. It won again and the Constitutional Council approved the law and its 19 articles on March 21.

Among the constitutional objections raised by left-wing senators was the fear that pension funds would throw the pay-as-you-go system off balance and would increase inequalities among retirees. They also attacked the law for failing actively to protect equality between men and women, to avoid possible discrimination in annuity calculations due to different mortality tables. But the council observed only that the principle of equality should be included in the spirit of every law but didn’t need to be spelt out in every text. The final step before the law is implemented will be the completion of 11 decrees due in June, according to recent statements by Finance Minister Jean Arthuis, so that French citizens can begin building up their complementary pensions from this summer”.

Unfortunately, the real irony of the audacious, market-oriented French pension fund act is that it may lack technical soundness and will eventually meet poor demand. At least, that’s what Frédéric Jolly, president of pension funds adviser Frank Russell in France, thinks. “The big failure,” he points out, “is that we didn’t take lessons from others’ experiences to avoid their past mistakes.”

The French pension funds system has two major fundamental weaknesses, says Jolly. The first is that it may not be pure defined contribution but instead will include a dose of defined benefits, as some employers will offer their employees the possibility of buying defined annuities with each contribution. The second is that pension fund assets will be managed with life insurance accounting rules, which lack transparency and deter managers from investing heavily in equities. The basic principles of these rules are that assets are valued on their entry price,and not marked to market, and that potential losses on this entry price should be covered by provisions and shareholders’ equity funding. Thus, French pension funds may naturally be bound to bonds, as French life insurance is, because bonds never suffer capital loss as long as they are brought to redemption. Other technical details are shocking observers, like the rigidity of the schemes for unsatisfied subscribers. The law allows an employee to shift his rights from one pension fund to another only after 10 years if he hasn’t left his job before that time.

The uncertainties surrounding the act have not deterred financial institutions from making early applications to set up dedicated life insurance subsidiaries to manage pension fund money. Among the pioneers are Société Générale, with new subsidiary Sogeretraite; Groupama, a mutual insurance company from Normandy, with Groupama Retraite, and other insurers like La Mondiale, Athena or La France Vie which set up a joint venture in March with pay-as-you-go pension manager Groupe Mornay. The only foreign bank rushing to join in is ABN-Amro subsidiary NSM .

The first candidates will congratulate themselves if the market proves a bonanza. But this does not look likely from today’s perspective. The king of French life insurance, Gérard Athias, chairman of the Association Française d’Epargne et de Retraite, which claims more than 500,000 subscribers and more than Ffr100bn ($17.5bn) under management, has described the pension fund market as a miserable one, because of poor fiscal incentives and the absence of lump sum payments. Even the Association Française des Banques, known for promoting banks’ interests, after polling more than 400 employers and 1,000 employees, assesses the pension fund market at only about Ffr19bn-23bn a year. The Caisse des Depots economic department does not produce any larger estimate, calculating the total subscription is likely to be in the range of Ffr12bn-30bn, “according to our rather optimistic hypotheses”.

If one thing is certain, it is that employers and employees will need more persuasion to explore the new pensions possibilities open to them.

Gilles Pouzin is a reporter specialising in financial issues with L’Expansion in Paris

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