Plans to reform the pension system in France are likely to culminate in a national strike on 7 March. The current sticking point is the raising of the retirement age, while real estate is likely to benefit from the turmoil as people invest in recently introduced private plans. Both the shift in age from 62 to 64 and the standardised plans launched in 2019 are aimed at combating a shortfall caused by the country's pay-as-you-go system.
The root cause of the conflict between the government and the unions is the imbalance in PAYG. The money active contributors pay into the system is immediately transferred to current pensioners. But when more active workers retire than workers enter the workforce and they live longer in retirement, the workers-to-pensioners ratio declines, which creates a deficit.
The government is then left with a choice: to either reduce pension benefits, increase contributions or find an alternative source of money. The French government is proposing to raise the retirement age as this will immediately increase the number of contributing workers and reduce expenditure. The unions see this as a direct attack on workers’ rights and finances and are opposing the reform.
The outcome of this battle is uncertain, but the turmoil has made the French increasingly worried about their retirement. In 2020, the Autorité des Marchés Financières authorised a survey, in which 71% of respondents said the goal of "having resources for retirement, having enough money throughout retirement" is one of their top savings priorities and 38% describe it as a "strong concern ".
In France, both the state basic pension (first pillar) and the company pension (second pillar) are funded as PAYG, while only the third pillar of private pensions follows the save-and-invest model. Despite France having one of the higher levels of savings in Europe, retirement savings remain underdeveloped. At the time of the last reform in 2019, it represented only €230 billion of the total outstanding, compared to €1,700 billion for life insurance and €400 billion for regulated tax-free savings accounts.
The ”Pacte” law, as the 2019 reform became known, created a standardised pension plan comparable to the US 401K, called Plan d’Epargne Retraite or PER, which can be accessed as an individual plan or via the employer. In addition to writing new contracts, policy holders of former complex and fragmented products can transfer their holdings. The government set a target of €300 billion by 2023, which looks achievable with €280 million already reported at the end of June 2022.
The individual PERs are sold via insurance companies and reached €41.4 billion in total value of contracts outstanding by the end of June. Encouragingly 28% was new business with 72% transfers from old plans. In March 2021, transfers accounted for 83%, so new business is growing.
The 2020 AMF survey also asked which investments were the most appropriate for saving over the long term and real estate ranked first followed by employee savings plans and life insurance. Most insurers offer real estate fund products in their plans. The Société civile de placement immobilier is an often-used vehicle. SCPIs are investment companies authorised to issue shares to institutions and the public and set up with the exclusive purpose of buying and managing property on behalf of the shareholders. They tend to have an open-ended structure.
Net inflows into SCPIs reached a record €10.2 billion in 2022 and total capitalisation amounted to €90 billion by the end of 2022 according to the Association of Real Estate Investment Companies, ASPIM, and research institute IEIF. This was less than €40 billion in 2015, reflecting a strong performance.
The rise in retirement savings since 2019 should have supported net inflows into real estate funds such as the SCPIs. No one knows what the outcome of the pension reform battle between government and unions will be, but if the French system continues to shift towards a save-and-invest model, then real estate should be one of the beneficiaries.