By Des Cooney
The British and French pension systems tend to be at opposite ends of the European spectrum, making comparison between the two relatively unique. The UK and France share similar population demographics, with roughly 15% of their population at age 65 or older. While each system is built on ‘three tiers’ – basic state, complimentary / occupational, private / voluntary – the execution of their respective pension policies is quite different. Despite differences in structure, both pension systems have undergone reforms since the financial crisis of 2007-08 in order to address the key issue of sustainability. The key difference between pension schemes in the UK compared to France can be found in their approach to ‘the market’ as a potential provider of solutions.
Pension schemes in France
The French system is highly centralised and relatively inflexible compared to the UK model. Pensions in France are heavily reliant on the Pay-As-You-Go (PAYG) approach combined with a legal requirement for employees to partake in occupational pensions. Voluntary schemes do exist, however most companies are reluctant to offer these in addition to compulsory pensions. France’s public pension fund is financed through payroll taxes derived from social security contributions which are currently 15.15% on income earned. The mandatory occupational pensions – ARRCO for non-executives, AGIRC for executives – have been designed to complement public pensions in order to supply between 70-80% of the retiree’s income. In general, French workers are eligible for full pension benefits after 41-43 years of contributions into the system, depending on the date the worker was born.
Projected budget shortfalls have forced the French government to introduce pension reforms over the last few years. This included increasing the required contribution period for full pension benefits from 40 years to the current levels, elimination of some tax exemptions, and the raising of pension contributions by 0.6% between 2013-2017.
Pension schemes in the UK
British pensions are far more market-led than their French counterparts. The United Kingdom’s pension system is comprised of public pensions (state-run), occupational pensions, and personal pensions. There are more individual or private pensions, and a reduced reliance on compulsory occupational pension schemes in the UK than in France. The “Old Age Pension” system in Britain is over 100 years old; it was established as a minimum floor for retirement-age persons who are unable to provide for themselves. Other UK Government pension arrangements such as the State Earnings-Related Pension Scheme (SERPS),and it’s successor the State Second Pension, were additional funds set up to provide a larger pension to people of low earnings.
Employees are eligible for full basic state pensions after 30-44 qualifying years, depending on the date of birth of the employee. Additional state pension benefits are available to those who work over the minimum required qualifying years. The default retirement age in the UK (65 for men, 60 for women) is being gradually raised for both gender to the age of 67 by 2028.
Contracting-out of the Additional State Pension
British workers have the option of ‘contracting out’ of the Additional State Pension if their employer runs a contracted-out, defined benefit workplace pension scheme. As a result of joining the scheme both employee and employer pay National Insurance contributions at a reduced rate. Members of a contracted-out workplace pension don’t contribute to the Additional State Pension whilst they are part of the scheme. This means that any Additional State Pension on retirement is sacrificed or reduced, depending on how long they have contracted out.
In 2012, the UK began introducing new defined contribution schemes in the workplace in an attempt to offset the decrease in supplementary pension contributions since the financial crisis. As of 6 April 2012, holders of a personal or stakeholder pensions along with contracted-out money purchase and defined contribution workplace pension scheme can not contract out of the State Second Pension.
Transferring Pensions from UK to France
For expatriates looking to access their UK pension funds when retiring in France, a Qualifying Recognised Overseas Pension Scheme (QROPS) offers several key advantages over keeping your pension in the UK system. Individuals who currently are, or have been in the past, members of a UK registered pension, and are contemplating retirement outside of the UK can consider transferring their retirement fund into a QROPS.