French government nears deal with unions on pension reform

* Socialist government to stick to cautious overhaul

* Talks target divisive idea of raising payroll charges

By Julien Ponthus and Nicholas Vinocur

PARIS, Aug 26 (Reuters) - France's government neared a deal with trade unions on Monday to overhaul the pension system through a slight lengthening of people's working lives that should rein in a spiralling deficit, union chiefs said.

Under market pressure to reform its indebted retirement system, the Socialist government has ruled out raising the legal retirement age of 62 and hopes sticking to softer measures will avoid setting off prolonged street protests.

Moderate CFDT union leader Laurent Berger - whose approval is crucial for the reform to be passed - called the first of two days of talks "positive". He said Prime Minister Jean-Marc Ayrault's proposal to lengthen the pay-in period was acceptable.

The government's main scenario is to make workers pay pension contributions for a period of up to 44 years starting in 2020, government sources say. As things stand, a pay-in period of 41.5 years is to be made mandatory for all by 2020, whereas today people retire after around 40.5 years in work.

"It's a good start," Berger told journalists after the talks, the last round of discussion with unions and employers before the draft reform goes to the cabinet next month.

"There will be no reduction in pensions, no change in how pensions are calculated before 2020 and no massive acceleration in lengthening the period for paying contributions."

The reform - the boldest of President Francois Hollande's 15 months in office - is to be presented at a cabinet meeting on Sept. 18 and then debated in parliament in early October.

Despite close scrutiny from foreign investors and the European Commission, Hollande and Ayrault - both struggling with approval ratings of around 30 percent - have opted for a cautious reform. Hollande has only a slim majority in parliament and is wary of alienating his party's left wing.

LIMITED AMBITION

While his approach has avoided strife, it falls short of European Commission calls for a rise in the legal retirement age, which is below Germany's 65, for example - even if people in many European states tend to retire closer to 62 in reality.

Despite support from moderate unions for switching to a Swedish-style points-based system, where workers have more say in deciding when they retire, Hollande's aides say such a change would be too dramatic during an economic crisis.

Some key details still need to be nailed down as hardline unions oppose workers having to pay longer for their pensions. They plan a day of protest and work stoppages on Sept. 10.

Hardline CGT union chief Thierry Lepaon said the talks were encouraging, but not enough to justify calling off protests.

One contentious point is whether the government will raise the "CSG" social payroll contribution that firms and employees pay to help plug a pension shortfall set to peak in 2020, which would inflate labour costs already seen as burdensome.

With the Socialists already fending off public anger over planned tax rises in the upcoming 2014 budget, Ayrault has said that no decision on the CSG would be taken until after the talks with unions and employers' group Medef.

Pierre Gattaz, head of the Medef employers' union, hinted that in exchange for a rise in the CSG, the government may offer firms a cut to the amount they pay toward family allowances.

"I reminded the prime minister that we were in an extremely grave situation, with a pension system burdened by a 15-billion-euro deficit," Gattaz told journalists.

Unions are divided. While the reformist CFDT says it favours a deep overhaul of the system, the more hardline FO and CGT warn they will fight any attempt to lengthen the pay-in period.

"I will tell Jean-Marc Ayrault: don't touch the pay-in period, because that will cross our red line," FO union leader Jean-Claude Mailly told Le Parisien daily. "People in companies are getting angry, and the situation is volcanic."