Reviewing the Rendezvous

France's review of its 2003 pension reform is underway. George Coats looks at the story so far

The Rendezvous 2008 with pensions, a tripartite review by the government and social partners to assess the impact of the 2003 reforms, is going to be a great disappointment. That at least is the consensus view among insiders in Paris, and observers indicate that players are already looking to the Rendezvous 2012 for any meaningful progress.

Ahead of the Rendezvous' opening in April, much was made of the experience of Prime Minister François Fillon, who as pensions minister at the time gave his name to the 2003 pensions reform law, and his pensions minister, Xavier Bertrand, who oversaw the governing party's preparations for the parliamentary debate on the 2003 reform. But relations between President Nicolas Sarkozy and Fillon have since deteriorated into open antagonism. Sarkozy has dispersed the social affairs old guard and installed new people on a steep learning curve. "The result is that the only person who knows what is going on is the social affairs adviser at the Élysée Palace," says an insider. "That's Sarkozy's style of government."

In such an environment it is difficult to assess the outcome of the Rendezvous. Nevertheless, it appears that some positions evident in April have become entrenched. For the government the key point is to hammer out a consensus on further parametric reforms to guarantee the financial sustainability of retirement schemes, increasing the employment of seniors and reducing the generosity of the survivor pension provisions for spouses and children.

The proposals around seniors are an attempt to temper the demographic shock by keeping people in the workforce for longer. Currently less than 40% of those aged between 55 and 64 are still in employment.

The government's proposal is that the contribution period required for a full state pension be extended to 41 years. The trade unions have in turn hardened their rejection of such an automatic increase, suggesting it be put off until 2020. Their proposal, however, is contrary to the projections of the Pensions Advisory Council (COR), a body established in 2000 to evaluate the implications of rising longevity on government finances, which the government has anyway indicated it considers over-optimistic in its GDP growth and unemployment hypotheses.

The trade unions have asked how employees can pay contributions for 41 years when employers have made it plain they do not want to retain older employees. The outcome will be that the government will turn tomorrow's pensioners into paupers, the unions say. They have called instead for a delay in implementing the proposal until there are real measures in place to improve the situation of seniors.

Observers suggest that the government is intent on pushing the measure through but they detect a hint that there may be some scope for a bit of give and take.

This could involve a more fundamental redrafting of the system. Under this scenario, the issue would be shelved as far as the Rendezvous 2008 is concerned and instead work will begin on the 2012 Rendezvous which could well involve a reform similar to that implemented in Sweden. Indeed, the COR will examine the Swedish system of notional defined contributions in a conference planned for the autumn. Last year, the Senate examined a report on the Swedish welfare system to assess its suitability to the French situation. It would then be left to the Rendezvous 2012 to discuss reforming the CNAV basic state pension system, to which private employees contribute, into an arrangement based on points.

"That is one idea that is emerging from the gloom," says an insider. "But it would represent a real structural reform."

And real structural reform is something that the French authorities and social partners have shown themselves less than anxious to embrace. There is still an evident antipathy to funded pensions systems in France. Observers point out that the 2003 reform was the last major change to the system and that it was based on a livre blanc produced by former premier Michel Rocard in 1991, seen as the last real groundbreaking document on France's pension problem. They add that much of the basis of the reform was laid by the government of one of Rocard's successors, Lionel Jospin, who lost office in 2002. The Jospin administration was also responsible for the establishment of the COR and the French pensions reserve fund, the Fonds de réserve pour les retraites (FRR).

Both Rocard and Jospin were socialists but the 2003 reform was enacted by a right-of-centre administration headed by Jean-Pierre Raffarin. And the timing and the politics are significant. The reform was drawn up in the shadow of the 2000-2003 market crisis and the Rendezvous has met in the wake of the fallout from the sub-prime crisis.

Five years ago attitudes to additional funding were coloured by a widespread revulsion at the Enron affair. The impact of the current market turbulence and the party political backdrop to the pensions issue were seen in April when French satirical magazine Le Canard enchaîné wrote that as a result of the global financial crisis the French pensions reserve fund, the FRR had lost some €3bn, or around 10%, of its assets.

The report was one more blow to an institution that feels it is under siege, according to insiders. Although respected abroad as a flagship for French institutional investing, in France the FRR is seen as being under threat. "Although the FRR has been very successful, it has problems," says an insider. "The key one is its paternity."

Initiated by Jospin to invest state assets so it would be in a position to ease the pressure on the general pensions system by 2020, the FRR was inherited by Raffarin and his right-of-centre successors who have treated it with a lack of warmth and sustenance reminiscent of a fairy story step-mother. Indeed, there has been no shortage of suggestions that it be killed off. Last August, the month when many people in France are on holiday, a report in Les Echos - which has shown itself to be notably well informed on social security issues - stated that the government was considering the resilience of the FRR, suggesting that its continuation was open to question. And Le Canard enchaîné reported that public accounts minister Eric Woerth envisaged merging the FRR with the Caisse d'amortissement de la dette social (CADES), a fund established to assume and redeem past social security debt.

"The problem is that it has been starved of funds since its inception, it was never given the level of funding foreseen by Jospin," says a source. "So although it lacks the resources to carry out its intended role, the more than €30bn in its kitty looks all too attractive to a government facing budgetary pressures."

The initial expectations were that by 2008 the FRR would have some €300bn under management. Setting out how the FRR should be funded, the Jospin administration foresaw its seed capital coming from the sale of UMTS licences and the tenders were on the minister's desk when the dotcom bubble burst. In August 2001, just before the first bidders dropped out, the income was expected to be in the region of €4.95bn. In a stunning example of financial climate change, bids were invited the following year at €619m with a fixed tax of 1% on UMTS revenues.

Other revenue streams also proved disappointing and although the proceeds of other sales of state assets were foreseen by Jospin as a source of FRR funding, it failed to benefit from the largest round of privatisations in France since World War II undertaken by the government in which Sarkozy was finance minister.

Recognising its vulnerability, the FRR prepared for the Rendezvous 2008 by lobbying for an extension of its legal remit by five years from the 2020 set in 2003. As Raoul Briet, the president of the FRR's supervisory board, told IPE at the time: "I think it will become possible to have a clear discussion about what kind of FRR we want and what is expected from the FRR from 2020. And if we start discussing about this period we will also have to discuss explicit guidelines concerning the funding policy of the FRR between 2008 and 2020. My view is to try to convince politicians and social partners to adopt 2025 or