Does the NDC scheme mimic the French point system?

ABSTRACT

After the implementation of the notional defined contribution (NDC) pension scheme in Italy and Sweden in the ‘90s, some authors argued that its design merely replicates the functioning of the points-based pension schemes already in place in France and Germany. The aim of this article is to assess the soundness of this proposition by comparing the properties of the French points-based pension system (FPS) with those of the NDC scheme, which refrains from intra-cohort redistributions by ensuring substantial uniformity of individual rates of return. In order to assess to what extent the FPS also avoids intra-cohort redistributions, we run several simulations for different career patterns. The results of the simulations show that the discretionary adjustments embedded in the FPS are responsible for random, regressive redistributions. Finally, the article identifies the theoretical ‘equivalence condition’ showing that full correspondence between the two schemes would require replacing the discretionary mechanisms of the FPS with an automatic adjustment of point values.

KEYWORDS:

• Notional defined contribution
• French point system
• redistributions
• pension systems

JEL CLASSIFICATION:

• H55
• J26

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In fact, ex post redistributions will occur among individuals according to the discrepancies between their actual life span and the cohort’s life expectancy. For an attempt to assess intra-cohort redistributions generated by the US, earnings-related Old Age Insurance scheme due to differences in ex ante life expectancies see (Liebman 2002), (Caldwell et al. 1999), (Gustman and Steinmeier 2001) and (Coronado, Fullerton, and Glass 2002). For an analysis of the redistributions arising in the U.S, pension system according to differences in career patterns see (Nisticò and Bevilacqua 2018).

² The growth rate of the contribution revenue is referred to as the Samuelson-Aaron rate, which ensures solvency only under steady-state conditions. Although the present article does not address the issue of financial sustainability, it is worth mentioning that the Swedish version of the NDC scheme, crediting a yearly rate of return equal to the rate of growth of average earnings, is endowed with a sophisticated balance mechanism ensuring solvency in a non-steady-state environment (Settergren and Mikula 2006). For a general analysis of financial solvency of the NDC scheme see Valdés-Prieto (2000) and Gronchi and Nisticò (2008), where the problem of managing the longevity risk is also discussed.

³ On observing the right-hand side of (3), it is readily seen that $\delta =0$ implies that the annuity divisor attributed to any individual i coincides with the life expectancy $\left(\sum _{j=n+2}^{n+m}{\phi }_{G_i+j}\right)$ at retirement of her birth cohort. Actually, in Sweden, where $\delta =0.016$, negative nominal adjustment rates were applied in the years (e.g. 2000, 2009, 2010 and 2013) that saw the rate of return credited to all account balances lower than 1.6%. However, the Swedish parliament has decided to compensate for the negative indexation of pensions with tax deductions on retirees’ incomes in order to sterilize the negative effect of (4) on current pension annuities.

⁴ Computing and comparing individual IRRs is meaningful insofar as the payment of contributions can be imputed entirely to workers. For an analysis of the literature showing that the actual incidence of pension contributions falls entirely on workers, see (Gronchi and Nisticò 2008, p. 141–143). For an analysis of the incidence in a two-sector model see Nisticò (2013).

⁵ Currently, the CNAV pension, which cannot exceed 50% of TRA, is calculated according to the following formula: ${P_C}_{NAV}=SAM\begin{array}{ccc}.& \tau & .\end{array}N/N^{\ast },$ where SAM is the average of the best 25 yearly gross earnings, $\tau (37.5\mathrm{\%}\le \tau \le 50\mathrm{\%}),$ denotes the accrual pension rate, adjusted according to the duration of the contribution period and retirement age, N is the length of the individual’s contribution period and $N^{\ast }$ is the required contribution period necessary to obtain the full-rate pension benefit (172 quarters for those born after 1973).

⁶ In 2010, the French parliament adopted a new pension reform, referred to as the 2010 Fillon reform, which extended the length of the full-pension contribution period and raised the minimum retirement age from 60 to 62 years. The reform also raised the retirement age required for a full-rate pension irrespectively of the duration of the contribution period from 65 to 67 years. At the end of 2013, the Hollande government embarked on a new pension reform that increased the length of the required contribution period to 43 years (172 quarters) for those born after 1973.

⁷ At present, the calling rate stands at 1.25, while the 2015 AGIRC-ARRCO Agreement has scheduled to raise it to 1.27 as from 1 January 2019 (Agirc-Arrco 2015a).

⁸ There is one more intermediate AGIRC bend point $T_B$, equal to four times $T_1$, which will be omitted for the sake of simplicity, given that the only difference with bend point $T_C$ is the employer’s/employee’s burden sharing percentage, which is left to the agreements between employers and employees at firm level.

⁹ Actually, BPs are also awarded when earnings are below an annually adjusted threshold, which is slightly above $T_1$. In 2017, at the cost of EUR 844.56 white-collars get 120 AGIRC BPs.

¹⁰ Note that Agirc-Arrco agreements do not specify the value of ECR, which is determined both by PAR and calling rate values according to the following formula: $ECR=PAR\cdot \mu$.

¹¹ It is worth noting that the 2015 agreement (art.10) laid the foundations of a new, unified system of supplementary pension scheme. In fact, from 1 January 2019, this joint PAYG ‘points-based’ system will replace AGIRC and ARRCO assuming all their rights and obligations. There will be two income tranches only, the first limited by TRA and the second for the part of earnings between $T_1$ and $T_C$, with ECR corresponding to 127% of PAR (Agirc-Arrco 2015a).

¹² In what follows, we will neglect the operation of the Swedish balance mechanism (see footnote 2).

¹³ An example of how publication of a vector of CPVs would allow workers to plan their retirement age is contained in Section 4.2 of Gurtovaya and Nisticò (2017, pp. 15–16 and Table 4).

¹⁴ The value of one pension point (CPV) under the ARRCO and AGIRC schemes for the year 2015, amounting to EUR 1.2513 and EUR 0.4352, respectively, are in force from 01.04.2013.