investment insights

    France’s pension reforms strike at a taboo

    France’s pension reforms strike at a taboo
    Stéphane Monier - Chief Investment Officer<br/> Lombard Odier Private Bank

    Stéphane Monier

    Chief Investment Officer
    Lombard Odier Private Bank

    Key takeaways

    • The French government plans to increase the retirement age from 62 to 64 to reduce the country’s debt burden. Reforms face widespread political opposition and labour strikes
    • The French economy employs relatively few 55-64 year-olds compared with other EU economies, and the country’s public spending is the bloc’s highest as a share of GDP
    • President Macron’s administration can push through legislation, which includes raising the minimum pension, under the French constitution
    • French sovereign debt yields have remained stable. We do not expect the proposed reforms, nor social unrest in France, to have any lasting impact on European financial markets.

    The French government has set its sights on overhauling the country’s pension system, by some measures, one of Europe’s most generous. The proposals signal a period of disruptions as labour unions pledge strikes to contest the fairness and need for reform. While significant at the level of the French domestic economy, as global investors we see little likelihood of the process triggering a lasting market reaction.

    Emmanuel Macron’s government estimates that reforms will generate EUR 12 billion in new revenues in 2027. Without an overhaul, it points to an additional government debt burden of EUR 500 billion over 25 years, equivalent to almost one-fifth of France’s nominal GDP in 2022. The plan, presented by Prime Minister Elisabeth Borne on 10 January, aims to raise the country’s minimum retirement age from 62 to 64 by the end of the decade. The proposal would increase the age that a worker is eligible for a full state pension by three months each year, starting in September 2023, through 2030.

    A fundamental overhaul of the French system is overdue according to the Macron government. “There is an urgent need to save our pensions system,” said budget minister Gabriel Attal, in a 12 January interview. The minister argued that the reform is not just about changing the retirement age, but is also needed to increase the value of the smallest state pensions to reach the equivalent of 85% of the country’s minimum monthly wage.

    An ageing population, in common with every advanced economy, is exacerbated by a relatively low share of 55-64 year olds in the French labour market. Just 60% of the population in this age bracket are employed, compared with 74% in Germany and 67% in the UK. Any increase in this generation’s participation rate, and pension contributions, would ease the payment burden on younger workers.

    An ageing population… is exacerbated by a relatively low share of 55-64 year olds in the French labour market

    The reforms also propose to extend the requirement for workers’ contributions to be entitled to a full state pension from 41.3 to 43 years before 2027, accelerating a 2014 reform under former President François Hollande. In return, the government proposes to raise the minimum pension to EUR 1,200 per month in 2023, from EUR 950 today, while maintaining exemptions from some physically-demanding professions.

    At 62, France has the lowest legal retirement age in the European Union. However, the ‘normal’ retirement age in France is 63.5 years old after a career starting at the age of 22 according to data from the Organisation for Economic Cooperation and Development (OECD). That is in line with an EU average of 63.5 years for women, and 64.3 for men, and compares with 62 years in Italy, 65 in Spain, and 65.7 years old in Germany.

    Total French government debt as a share of gross domestic product is the fifth-highest in the EU, at 138%, and similar to Spain’s (and the UK’s) 143%. That is higher than the OECD’s 90% average, and the 77% level in Germany. French public spending, which covers health, social services and pensions, remains the highest in the OECD at more than 61% of GDP in 2020. We expect the country’s economy to expand by 0.3% in 2023, compared with 0.2% in the wider eurozone.


    40-year taboo

    Pension reform has become something close to a political taboo in France and efforts at change have struggled historically. Some polls estimate that as much as three-fifths of the population is against raising the retirement age and labour unions have questioned the government’s budget calculations, and the necessity of reforms. They argue that 2014’s reforms, in effect since 2020, will balance the system by 2040 by increasing the years of pension contributions to 43 years for people born after 1972.

    Pension reform has become something close to a political taboo

    National strikes are already planned for 19 January, and others may follow on 26 January and 6 February. Popular strikes have reversed efforts at change in 1995, labour law reforms in 2006 and again in 2010. Starting in October 2018, the ‘gilets jaunes’ (yellow vest) movement targeted a series of issues, bringing thousands to the streets, which only dissipated with the Covid pandemic. Protestors’ grievances included a carbon tax, fuel costs and projected pension system changes. Since the pandemic, the cost of living crisis has only intensified concerns. The French government has responded to Covid’s aftermath and the consequences of the Ukraine war with subsidised petrol prices and has capped energy prices. These measures helped French inflation to an annualised 6.7% in December, one of the lowest rates in the EU. Consumer prices across the EU increased by an average 9.2% last month, compared with a year earlier, including a 9.6% rise in Germany, and by 12.3% in Italy.

    President Macron’s party, ‘Renaissance,’ formerly ‘La République En Marche,’ needs the political support of other parties in the National Assembly to pass its legislation. Two centrist parties, ‘Mouvement Democrate’ and ‘Horizons,’ have already backed the reforms. The additional support of the liberal-conservative ‘Les Républicains’ (LR) party also looks likely. Its leader, Eric Ciotti, said the party was ready to back a “fair reform”, even though several LR deputies continue to oppose it. Failing that political backing, the government could use Article 49.3 of the French constitution to push through its proposals.

    If France’s past efforts at reforms…are any guide, changes to domestic pension spending will not impact financial markets

    Solvency and OATs

    While the French government’s deficit calculations are based on the long-term, we see no solvency risk in the medium term. Investors remain focussed on central banks’ monetary policy and policymakers’ benchmarks are the most important market driver. If France’s past efforts at reforms, and their accompanying social unrest, are any guide, changes to domestic pension spending will not impact financial markets. The spread between French and German 10-year government bonds has remained relatively stable over the past decade. French sovereign OATs (Obligations Assimilables du Trésor) currently yield a premium of around 50 basis points, at 2.55%, compared with their equivalent German Bunds (see chart).

    More widely, the broad outlook is challenging for European sovereign debt. Government spending and the European Central Bank’s gradual reduction of its asset purchase programme are boosting the supply of sovereign debt, while interest rates will continue to rise in the months ahead. In this environment, we prefer US Treasuries, and investment grade credit. In equities, we remain cautious on European names, despite valuations having fallen below their long-term averages, given further expected downgrades to earnings. Finally, we note that the euro has seen a stronger performance recently, as manufacturing data stabilises, and amid a mild winter and lower energy prices.

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