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France is once again pondering the prospect of a capitalization pension system for all its citizens, following the lead of the existing scheme for public officials. This system, advocated by Justice Minister Gerald Darmanin as necessary to avoid further delays in the legal retirement age, is becoming an increasingly viable option, according to Édouard Philippe.
In a capitalization pension system, each individual contributes to their own retirement savings, or a company contributes on behalf of its employees. Unlike the current French pension system, where resources mainly based on contributions on professional earnings are used to pay retirees' pensions simultaneously, the payment of pensions in the capitalization model is ensured by the financial revenues of the specific scheme. This is based on the additional pension scheme for public officials (RAFP), which has been in place since 2005.
Civil servants have been contributing to this part-capitalization pension scheme since 2005, with approximately 4.4 million state, territorial, and hospital public service agents now participating. These personnel contribute a share of their bonuses and allowances, while their employer also contributes a similar amount. The contributions total 10% of the applicable bonuses and allowances, with a cap based on 20% of the gross indicative salary.
The scheme, which will celebrate its 20th anniversary in 2025, has been instrumental in securing the level of pensions for civil servants, as their regular pension schemes only contribute on a portion of their remuneration, with bonuses and allowances not included in the basis of contributions. This gap was filled by the RAFP, with bonuses and allowances constituting an important 24.4% of their total remuneration.
The contributions made to the RAFP are deducted monthly from paychecks and feed a fund that invests €3 billion annually, based on decisions made by the RAFP's Administrative Council, composed of representatives of agents and their employer. Investments are oriented around 40% in stocks, 40% in bonds, 10% in real estate, with the remainder invested in unlisted assets or infrastructure. The financial management of the scheme yielded an average return (TRI, internal rate of return) of 4.3% since 2005, reaching 5.9% in 2024 and 8.8% in 2023, following an unfavorable year in 2022.
These returns allow the RAFP's Administrative Council to increase the service value of the point used to calculate the public servant's pension upon retirement, with the value having increased significantly in the last two years. This, in turn, provides civil servants with an additional pension to their basic pension. For all former agents who have contributed to the scheme, this amounts to €413 per year, while the sole cohort that retired in 2024 received €483 each.
The emerging capitalization pension system, if brought to fruition, will shift France from a traditional pay-as-you-go (PAYG) distribution model to a system based on individual savings accumulated through capital investment. The proposed PER system offers more flexibility and control, acting as a "fiscal shield" with tax advantages and the possibility to diversify investment strategies. However, cultural caution and regulatory complexity in France make wide adoption gradual, with debates ongoing about integrating more private equity into pension funds to improve returns.
- In a proposed capitalization pension system, each individual or a company could contribute to the personal-finance savings of its employees, providing them with more control and flexibility over their business-related earnings, similar to the existing RAFP scheme for civil servants.
- If implemented, the PER system could transition France from a traditional pay-as-you-go (PAYG) model to one based on individual-actions like capital investments, potentially yielding higher finance returns and offering tax advantages, although cultural and regulatory complexities could slow down its widespread adoption.
