To give it its full title the French Law 2003-775 on pensions was definitively approved on August 21 this year and will be applicable as of January 1, next year. Its objective is to achieve an actuarial equivalence between private and public sector.
This harmonisation principle of this law has several consequences for the private sector:
o Impact on state pension benefits and costs;
o impact on the tax deductibility of benefit programmes; and
o Impact on companies with a defined benefit(DB) pension plan.
Some of the changes are already applicable because of the legislation; others will be implemented by decrees that are to be enacted before the end of the year.
Impact on state pension benefits and costs - A summary of the major changes are:
o Planned increase in the contribution period resulting in de facto increase in the retirement age;
o Social security pensions will be calculated on the basis of 160 trimesters instead of 150, decreasing the state pension for those with less than 160 trimesters to their credit;
o Increase in the state pension contribution rates;
o Companies will no longer be able to ‘retire’ employees before age 65 even if they have the full contribution period; and
o Social security early retirement factors will be decreased from 10% per annum to 5%.
The above changes will definitely impact mandatory pensions from ARRCO and AGIRC; but how they will be affected is not yet known. Negotiations are currently taking place between unions and companies.
Impact on tax deductibility: The current tax deductions limits for benefits programmes were revised. It is anticipated that from 2004, the tax deductions ceiling will be changed as follows:
o Contributions towards state/ARRCO/AGIRC retirement programmes are no longer included in the calculation of the tax limits. They are, by essence, tax deductible and are not subject to social dues.
o Contributions, both companies and employees, towards company sponsored group insurance programmes will be tax deductible up to 3% of seven times the social security ceiling from a current deduction of 3% of eight times the ceiling.
o An additional deduction for retirement pension is being introduced. It is 10% of annual salary with a maximum deduction of E24,000 and a minimum deduction of E3,000. Company and employee contributions to a defined contribution (DC) plan are included in the limits.
o Any company contributions in excess of the limits will be considered salary. As such, it will bear social dues and will be viewed as taxable income to the employee.
Impact on DB pension plan: Prior to this law, the French social security authority (URSSAF) had introduced a number of actions which treated contributions to DB plans as salary subject to social taxes. Protests by companies were based on the argument that such plans are not vested; thus, no dues should be levied.
This new legislation on pension will settle the argument by introducing new measures which include:
o All actions taken by URSSAF against a company are voided IF the company agrees to one of three percentages flat rate tax to be paid to URSSAF from 2004.
o The level of the flat rate tax varies depending on the basis it is applied – external contributions, internal reserves or benefits paid by the company. The choice of the basis is to be made by the company and must be selected by December 31, 2003 with penalties payable.
It is important that the choice is made wisely, especially in view of its recurring aspect and impact in the mandatory accounting standards requirements.
Gilles Frechet is with Global Benefit Associates part of ASINTA