Voluntary pension funds are growing in importance as a hedge against a decline in the mandatory pension and as an employee retention tool, says Nina Röhrbein
With the outlook for France's mandatory pension system, which consists of the state pillar and the supplementary Agirc-Arcco, looking anything but rosy, attention is slowly turning to voluntary third pillar solutions.
The UMR Corem pension fund was created originally as a voluntary, individual scheme by and for French teachers. Contributions attracted a fiscal advantage, with every franc members put in being tax deductible, according to Vincent Ribuot, (pictured right) UMR Corem's chief investment officer. But after the 2003 Fillon law made the fiscal advantages available to pension vehicles like the plan d'epargne retraite populaire (Perp) and plan d'epargne retraite complementaire (PERCO), UMR Corem asked to be available to the entire French population.
Today, the fund, which has €4.7bn in assets under management, is open to everybody regardless of occupation or region, says Ribuot. "The only thing we require is for people to become a member of a mutual insurance company, as we belong to the French mutual companies," he says.
The pension fund currently has around 280,000 members, and 5,187 new members joined in 2007. And Ribuot expects 10,000 more to join.
He says it is a hybrid scheme. "It is a mix between defined benefit (DB) and defined contribution (DC). The DB part of the scheme is that every year, through the use of the technical rate, every member knows exactly what the lifetime guaranteed rate of return of the annuity he bought is. And the defined contribution part of the scheme is that members can decide themselves how much they want to put into the fund."
Ribuot says that apart from a few big international companies, pension funds in France are limited in numbers or restricted to a certain part of the population such as civil servants or notaries, for example.
And indeed when it comes to large, multi-national companies, voluntary savings schemes seem to be the preferred option.
The retirement options that the international pharmaceutical company Sanofi Aventis offers to its 30,000 French employees, are group savings plans plan d'epargne groupe (PEG) and PERCO. In fact it was one of the first companies to launch a PERCO in 2004, according to Wolfgang Weber, the company's global head of asset management and pensions.
"While we have been offering a PEG for a long time now, the PERCO is still relatively new," he says.
"The main difference between the two systems is the blocking period. Employees have access to the money in the PEG after five or eight years, whereas they can only withdraw money from the PERCO on retirement, except for certain events like the purchase of a principle residence or invalidity. In the PERCO, upon entering retirement employees can choose to either purchase an annuity or to remain invested in the PERCO.
"Employee contributions may come from the salary or from profit or gain-sharing schemes (participation or intéressément). Subject to certain conditions, the company tops up employee contributions to both vehicles. Both PEG and PERCO are supervised by a board, the conseil de surveillance, composed of trade union members as well as members representing the human resources and finance function of the
Power generation and rail transport industry equipment and service provider Alstom also offers a PERCO. The company adds 50% to the first €500 paid into the PERCO annually, 30% to the next €500 and 20% to the after €500. Employees can contribute money they receive through profit- or gain-sharing or convert holidays not taken into money for the PERCO.
"This plan design is a first step for us and we will consider enhancements over time and as regulations and markets develop," says Nicolas Khalife, (pictured left) Alstom's global benefits director. "It is useful to have these third pillar options in place as the French first and second pillar systems may not be sustainable and sufficient over the long term."
Both Sanofi Aventis and Alstom offer their employees several investment options, ranging from pure money markets to pure equity funds. "The choices of funds are decided by company and employee representatives," says Khalife.
"A committee reviews the various funds' performances on a quarterly basis, while a full analysis would be undertaken every three years. Generally, employee representatives prefer sustainable funds that integrate socially responsible investment rather than higher expected return options managed by companies seen as encouraging capitalism."
He continues: "Risk levels of each fund are communicated to our employees. Thus, most of our employees are aware of the risk levels they take. Despite the recent market turmoil, we did not see a large switch of funds by our employees, but this could be due in part to the large portion of members who have elected the lifestyle-type option."
However, none of the funds offered through the PERCO has investment options in alternatives. "We tested the water with some alternatives in other countries but our experience with these did not match our overall expectations," says Khalife.
"It takes a lot of intellectual capital and time to monitor and review these types of funds and interact with each of the managers and we would need to acquire more in-house knowledge to be able to undertake that.
"We are also reconsidering passive versus active investment in a few areas where the merits of active management have not been proven. Nonetheless, we continue to see the benefits of diversification between and within asset classes."
Hedge funds or other alternatives are not offered through Sanofi Aventis' retirement savings schemes for reasons of transparency and reputation risk.
"We have to offer the employees different options with different risk/return profiles, whereby we need to offer one risk-free option for those who either need their money very soon and for those who are very risk-averse," says Weber.
"But the less risky asset classes have now come under scrutiny as over the past few months many money market funds have had problems meeting their benchmark."
Some two thirds of the UMR Corem fund is invested in very long-term bonds - largely fixed but with an increasing amount of inflation-linked coupons - while 15% is allocated to European and global stocks, 10% to mainly logistic and commercial real estate in the euro-zone, 5% to funds of hedge funds and 2% to private equity, the rest being uninvested cash.
"Every year we create a model of our liabilities which we then use to define a strategic asset allocation that will maximise our funding status in the long term to ensure we can pay out pensions," says Ribuot.
"At the end of 2007, due to the 3% discount rate of liabilities used by the French regulator, we were 98% funded. However, under the rules of neighbouring countries, such as Belgium and the Netherlands, we would be 140-150% funded, which would allow us to be more aggressive in our asset
He adds: "The credit crisis has had an impact on our asset allocation, tactical more than the strategic. And it has influenced the way we speak to asset managers. But maybe now is also the time to reinvest after interest rate and credit markets were too expensive for many years."
According to Weber, companies use PEG and PERCO as a retention tool, particularly as paying a higher salary is fiscally less attractive for the employer. He says they also help to establish good relations with trade unions.
"As the first pillar is unlikely to provide sufficient pensions coverage in the future, the importance of third pillar schemes is growing," Webber says.
"Many large firms already offer a PERCO. But for small- and medium-sized companies it is often difficult to offer such schemes due to the required amount of administration and expert advice needed."
Ribuot believes that voluntary pension funds are important in France. But he says that as a large number of people regard pension funds as politically incorrect,capitalist undertakings, so more education is needed. "The French still think life insurance is the way forward as they know they can take back their capital at any time," he says.
"It is difficult to explain that a pension is not about capital but about having an income when they retire."
Ribuot concludes: "One of our commercial developments is the creation of a Corem-type fund on a company basis, a CoremCo, which resembles a second pillar scheme because it is compulsory for company employees. It is in its second year and companies with between 200 and 5,000 employees are very interested."