Second pillar pension reform : what strategy should you adopt ?

In 2015, the social partners agreed on a series of measures designed to claw back the deficit of the Arrco and Agirc second pillar (complementary) schemes. One of these measures will take effect on 1 January 2019 and is a bonus-malus [negative bonus] system applicable to the complementary schemes. This arrangement was thought up in order to encourage salaried people to put off retirement for one year but, on the contrary, it may be pushing some people to retire earlier.

Reduction of 10% if retiring at full pension

 As from 2019, salaried people who decide to take retirement as soon as they have met the conditions for a full pension, will see a reduction of 10% of their Arrco-Agirc second pillar pension income for between one and three years. For example, a manager, born in 1957, with net salary of €4,500 per month can expect, today, a monthly pension of around €3,000, provided he or she has patiently built up the166 quarterly contributions required. This pension comes in part from the basic (first pillar) scheme (for around €1,400) and from the Arrco-Agirc complementary schemes (for about €1,600). How will this example pan out in 2019? The person having retired on “full pension” will in fact suffer a penalty of 10% of the second pillar pension for three years before actually receiving a “true full pension”. He or she will then have lost the princely sum of €160 a month over 36 months, i.e. a total of €5,760.

 How can one avoid such punishment? By putting off retirement. That same manager who notches up his/her 166 quarterly contributions in June 2019, can effectively draw a true “full pension” (within the meaning of the Arrco-Agirc schemes) by working four more quarters. In practice, this means working on up to June 2020. If, caught up in the enthusiasm, he or she goes on for another four quarters up till 2021, then they will get a bonus of 10% for one year. That is the whole point of the reform: encourage salaried people to postpone their retirement for one or even two years.

What happens if you go before reaching a full pension so as to avoid ‘negative bonus’?

Since negative bonus applies once one has met the conditions for full pension (within the meaning of the basic, first pillar, scheme), it might be tempting to avoid it by leaving one quarter before. However, that decision would entail a life-long reduction in pension income applied to both the first and second pillar schemes. As a consequence, our young retired person would lose around €50 a month, just by rushing to retire one quarter early to avoid the negative bonus penalty.

After 10 years the loss every month would reach €6,000 (€50 x 120 months) and therefore even more than the loss of income through negative bonus (€5,760). Financially, therefore, it is better to suffer the negative bonus penalty rather than a lifetime “haircut” by retiring early.

This could well leave doubt in the minds of employees

Is the issue always seen in rational and financial terms? Studies have proven that most salaried people do not want to postpone their retirement from working life, even if this means losing out financially. Before the bonus – malus rule came in, leaving before reaching full pension was unheard of and even preposterous. In 2019, the issue may well arise again but the gains will be with short-lived. Some newly retired people, anxious to live life to the full, may decide to leave one quarter before full pension, and profit from the good years with enhanced purchasing power rather than provide for, and keep on providing for a long retirement. A “bird in the hand is worth two in the bush”.