Nora Ouidir discusses corporate approaches to retirement and human resource issues in France
Implemented in December 2010, the pension reform law changed the age at which employees have traditionally become entitled to their pension, raising it from 60 to 62. At the same time, supplementary pension plans offered by companies have been a huge success: encouraged by favourable tax and social security conditions, and more recently by incentives introduced by lawmakers, they have become real compensation tools for companies. Retirement has gone from the exclusive domain of the government to a human resource policy issue for companies.
The French pension scheme is based on the Bismarckian system and operates according to the pay-as-you-go principle.
The order of 1945 and the law of 1946 created the general Social Security scheme and then broadened it to include all private sector employees. In 1947, labour and management representatives signed the National Collective Agreement establishing a supplementary pension scheme (AGIRC) aimed exclusively at management staff in industry and commerce. On 8 December 1961, labour and management representatives signed the Inter-professional Agreement establishing the ARRCO supplementary pension scheme for non-management employees. In 1972, supplementary pensions became mandatory for all employees. Since 1974, management staff have been required to be affiliated with ARRCO in addition to their affiliation with AGIRC, but only for the first portion of their salary. In 1972, women obtained their full-rate pension at age 60 under the general scheme, a condition which became applicable to all employees in 1982.
A weakened system
When the mandatory system was introduced, the average retirement period was 16 years, today the life expectancy of a retiree whose pension is calculated at age 60 is nearly 22 years for a man and 27 years for a woman. This increase in life expectancy has given rise to an increase in the retiree population, creating long-term funding pressure on the mandatory pay-as-you-go system. Increasingly, the pay-as-you-go system is posting a loss. The government must therefore resort to borrowing, which has the effect of deepening the social security deficit, and each employee is being asked to pay two new payroll taxes.
In 1993, the Balladur government made a change to retirement at age 60 by extending the time required to obtain a full-rate pension under the general scheme from 37-and-a-half-years to 40 years (160 quarters). Financial viability was, for the first time, at the heart of the debate.
In 2003, the Fillon Law changed the condition for acquiring full-rate pension from 160 to 164 quarters in which contributions were paid. Lawmakers therefore reaffirmed the pay-as-you-go principle, but encouraged us to remain employed longer.
The pension reform law of 9 November 2010 gradually increases the retirement age to 62. It also increases the necessary periods for paying social security contributions in order to obtain a full-rate pension and encourages retirement savings plans: by making the choice of the pension calculation date more flexible, lawmakers tend to make employees and companies more accountable in terms of retirement.
Retirement is a hot topic. The French public is becoming aware of the need to compensate for the announced decrease in the amount of their pension.
For most of the working population, the emphasis is on creating long-term financial savings. Since the 2003 Fillon Law, the French - whether or not they are employed - have access to a number of individual schemes, such as life insurance, securities and individual savings products. The plan d'épargne retraite populaire (PERP), for example, allows investors to make voluntary individual payments. The savings under this plan are unavailable until retirement and are then paid in the form of an annuity. Encouraged by lawmakers with further help from the trade unions, this individual awareness of the need to create personal retirement savings has not escaped the attention of French companies. These companies now understand the importance of pension as a key component of the employee compensation package.
The 2003 Fillon Law made it possible to diversify collective retirement savings schemes. Because of their diversity, the available tools can be adapted to the various categories of employees, thereby satisfying a wide range of requirements.
There are two types of supplementary pension plans: defined contribution plans and defined benefit plans.
• In a defined contribution plan, a commitment is made by the employer to contribute a defined amount to the plan. Contributions and financial returns accumulated over the years form savings which are converted into an annuity at the time of retirement. In this type of plan, the funding horizon, the amount of the contributions and the financial returns are crucial parameters. So-called ‘Article 83' plans (within the meaning of the General Tax Code) generate contributions defined according to the employee's salary which become ‘mandatory'. Beneficiaries' rights are vested, even if they leave the company. PERCO (collective retirement saving) plans receive payments based on the employee's desire to save under this plan. The employee has the option of paying sums from profit-sharing and incentive schemes and can make voluntary payments; the employer can also match the sums paid. Beneficiaries' rights are also vested.
• Defined benefit plans are plans for which the employer commits to provide a defined amount of pension benefit. This type of plan generally involves a gradual entitlement to pension benefits based on the years of service and on the last salary or an average salary basis in order to contain and smooth out the company's expenses. Generally speaking, all defined benefit plans provide unvested rights - so-called ‘Article 39' plans, as provided by the General Tax Code - and payment of the benefit is conditional upon the employee's presence at the company at the time of retirement. These plans are fully funded by the employer.
... to fulfil various requirements
By their very nature, these plans allow the company to adapt to the various categories of employees. For example, a PERCO can be offered to all employees. Each person is therefore free to create additional retirement savings if she so desires. This type of plan favours lower paid employees, who can invest sums from profit sharing and incentive schemes and take advantage of the employer's matching contribution without a negative impact on their purchasing power. At the same time, the company can use the plan to motivate its employees and to create or maintain a healthy corporate climate.
The implications are a little different in terms of compensation of management staff. A company wishing to offer its management staff an attractive compensation package will tend to focus on an ‘Article 83'-type plan. These defined contribution plans are favourable from a tax and social security standpoint and are designed for middle managers with long-term career prospects. The pension reform law of 9 November 2010 also made the system more flexible by introducing a voluntary individual payment option.
Moreover, retaining senior management staff remains a major concern for most large companies. Given the way in which ‘Article 83'-type plans are set up, these defined contribution plans are really effective only if the funding horizon is at least equivalent to life expectancy upon retirement, ie, approximately 25 years. And yet the seniority required for a senior management position implies a more advanced average age and therefore poses a problem as to the amount of time needed to accumulate funds. For this reason, most large companies offer defined benefit plans to their senior managers, which enables them to accrue an attractive supplementary pension.
The company's new roles
These plans are currently at the heart of discussions regarding companies' human resource policy. The implementation of these tools and the selection of service providers, their financial and administrative management, compliance with the applicable legal requirements, their cost effectiveness, reporting to labour and management representatives, and communication to employees are just a few of the new responsibilities for employers. Another issue is the individualisation of retirement, made possible by the various measures taken by the government, which forces employers to fully understand the tools and implications based on the various situations. But are all companies prepared for the new responsibilities facing them? In any case, their position as a key influencer and their duty to inform have increased significantly, as has the need to develop or create new business lines internally which are capable of co-ordinating these matters and seeking the appropriate legal, economic and financial assistance and advice. An enormous challenge!
Nora Ouidir is a consultant at Mercer in Paris