French daily Le Figaro on 5 April 2016 reported on a study by the Conseil d’Orientation des Retraites (COR), the French pensions advisory council, which simulated the impact of the Agirc-Arrco agreement of October 2015 on the amount of supplementary retirement income of private sector employees in France.
The report found that de-indexation measures, gradual declines in pension benefits (i.e., lower benefits for a given contribution) and a flat-rate reduction for those who retire before the full-benefits age will subject retirees to a reduction in benefits, the extent of which will depend on:
- their age;
- their executive or non-executive status;
- their pension settlement date: simply put, in most cases, beginning in 2019 a 10% reduction for three years for retirees with the required number of quarters whose pension settlement date is at the legal minimum retirement age (currently 62 in France); no reduction for those who work one extra year; a bonus for those who postpone their retirement by two years or more, which could be as high as 30% for one year. Small pensions are exempt from this reduction.
Some examples, applicable to most cases, are provided below:
More generally, COR estimated the decline in the total pension (basic + supplemental) of a person born in 1960, who keeps his settlement date at age 62 and to whom a coefficient of solidarity is applied at 6% at the executive level and at 3% for a non-executive employees (with the portion of supplemental retirement equal to 60% of the total benefits received by an executive vs. 30% for a non-executive).
The structural causes of all this are longer life expectancy, the ageing of the population, and the sluggish economic environment, which has decreased the number of contributors to pensions. France is actually the world champion in duration of retirement, at 23 years on average, with the average life expectancy of a person upon retirement being 17.6 years for men and a record 27.2 years for women according to an OECD study from 2015. We felt that the case for women was so remarkable that it deserved its own special study - one which will be released very soon by BNP Paribas Asset Management.
Saving for retirement: a must
All this makes the issue of retirement financing even more difficult. How can one's living standards be preserved? There is no miracle cure, but nor are all efforts doomed to fail. An increase in individual savings will inevitably be required, in oru view. But don’t mix up retirement savings and precautionary savings. Retirement savings are not meant to be used for a rainy day and precautionary savings’ expected returns are too low (and even negative nowadays) to generate supplemental retirement income (see the article published on this blog “The paradox of savings in France”).
So to offset the loss of income when retiring it may be wise to:
- Start saving as early as possible: this makes things easier due to compound interest.
- Save regularly: financial savings plans have proven themselves; not only do they spread out savings over time, they also smooth over entry points in risky assets. You get the best of both worlds by investing the same sum regularly in all market configurations. When the markets are up, average purchase prices rise but so does invested capital on the whole. When the markets are down, you buy a higher number of shares with a lower average purchase price, which cushions the market impact on the portfolio.
- Diversify one’s investments. This reduces risk through exposure to sources of returns that are not fully correlated, which ultimately enhances performance per unit of risk over the long term. Don’t stay completely out of risky assets even during periods of market volatility, as you may miss out on market gains. That said, active allocation of risk factors is, of course, an additional potential source of added value.
- Structuring one’s savings with investment horizons helps better manage exposure to risky assets over time and avoid late-investment-period incidents.
- Pay attention to the tax regime chosen.
Target-date funds: the right packaged solution for supplementary retirement income
Target-date funds allow the manager to adjust the portfolio’s composition between equities and fixed-income products (bonds and money-market) based on the date corresponding to the investor’s need. The further away the target date, the more the fund is exposed to equities for the purpose of tapping into their potential performance. Each year, the manager shifts a portion from equities to fixed-income products to reduce risk and secure the investor’s savings. When the target date is reached, the investor possesses a capital invested in a diversified, very low-risk portfolio that he may cash out at any time in whole or part, for example, via scheduled withdrawals.
In splitting up his capital into funds with different target dates, with increasing maturities covering the theoretical period of his retirement, an investor can thus generate steady income throughout his retirement while keeping the savings that he doesn’t need in the near future exposed to the financial markets. Don’t forget that most French people older than 70 "do save and they save about as much as the rest of the population in proportion to their income”, according to a December 2015 report from COR (see the article published on this blog: “Retirement savings: investing beyond life expectancy”).