FRANCE - The compensation system of the French pension system, which involve capital transfers between pension schemes to reduce financial imbalances, are difficult to understand, complex and, need to be reformed, a report has found.

According to the Conseil d'Orientation des Retraites (COR) - which monitors the French retirement system and puts forward recommendations for public policy - the current compensation measures have led to inequalities between French pension schemes and should then be reorganised as the funds are not left on even footing.

The compensation system, which was established in 1974, aims to correct the financial imbalances of some pension schemes with a regular transfer of capital between the schemes showing strong financial results and those for which the perfomance is decreasing due to social-economic changes.

According to the report, the compensation effort, which represented €8.1bn in 2009, is supported by only a handful of schemes - with the national fund for retirement provisions (CNAV) contributing 60%, the pension fund for local government officials 19% and the pension fund for civil servants a further 13%.

On the other side, some pension schemes' funding level largely depends on the transfer made. Therefore, the funds for farmers currently receives 80% of the total transfer volume.

One of the alternatives of the compensation system could therefore be the use of reserves.

However, the report conceded that schemes supporting the compensation effort have failed to implement sufficient reserves over the years.

The COR said: "While the compensation refers to an immediate management of the financial imbalances recorded with transfers made at a given date, the reserve is part of a dynamic management mode.

"Due to the compensation measures established in 1974 however, French pension schemes involved in such a system have not been able to put in place enough reserves as they have been asked to transfer part of their capital to other underfunded pension funds."

In addition, the current compensation regime is itself based on two pillars with two different methods of calculation, which brings more confusion to the transfer between schemes, according to the COR.

The first pillar organises a transfer between pension schemes representing employees only, while the second one comprises a transfer calculated between the schemes representing the employees and those representing the non-employees.

Instead of abolishing the whole compensation system, the COR suggests getting rid of the two pillars as a way to simplify the regime.

"The suppression of the two pillars would help to simplify and clarify the mechanisms of the compensation system", the COR added. "The transfers would then be based on one regime only, which would help us to align the calculation methods."

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