Passed by the French Parliament in July 2003 then validated by the Constitutional Council, the law on pension reform was published in its final form (as law No 2003-775) on 21 August 2003. A number of articles of the law are still to be dealt with by decree in the course of 2004.
Several of the bill’s measures are designed to extend the length of the working life and to encourage older workers to remain longer in the workforce. Consequently the reforms will have a direct effect on a company’s liabilities. In the long term, the new measures specific to older workers will require employers to begin systematic planning of their workforce and talent needs.
Special measures for older workers
o Mandatory retirement. The age at which an employer can oblige an employee to retire is raised to 65 (except in case of extended sector-level collective agreement). Any retirement earlier than 65 will be limited to measures taken as part of redundancy plans.
o Exemption from the Delande Contribution. As of 28 May 2003, employers are exonerated from paying this contribution if they make redundant an employee hired after the age of 45.
o Gainful employment in retirement. In the private sector, people can now both receive a pension and earn income from employment, as long as the wage earned plus the pension does not exceed the last wage earned before retirement.
o Early retirement: two sets of measures:
Civil service: Progressive early retirement is abolished as of 1 January 2005. As to the CATS scheme, only those strands applying to older workers having had an occupation of an arduous nature will continue to apply beyond 1 January 2005.
Private sector: Company early retirement agreements concluded after 27 May 2003 will be subject to a special contribution of 23.85% payable to the Pensions Reserve Fund (Fonds de Solidarité Vieillesse). A reduced but gradually increasing rate will apply until 31 May 2008 if the arrangement provides for compulsory contribution to the voluntary old age insurance programme (Assurance Vieillesse Volontaire) and continued contribution to complementary retirement plans.
Social security reforms
The governement’s objective is to guarantee financing of retirement up to 2020 while maintaining the 2003 ratio between the duration of work and that of retirement . The contribution period will increase as needed as life expectancy grows.
o Full rate: By 2008, all employees (private and public sectors, special pension programmes excluded) will have to pay contributions for 40 years in order to receive full state retirement pension. Starting in 2009, this period will increase by one quarter per year to reach 41 years by 2012. Thereafter the contribution period will increase as needed to keep the ratio of the contribution period to the average payout period at two to one.
o Bonus: Introduction of an actuarial increase in the pension payable to people who retire after age 60 and with more than 40 years of service. Starting in 2004, the pension payable will be increased by 0.75% per prorated quarter (to maximum age 65).
o Additional measures: Continuation of indexation of pensions which will be based on the consumer price index (excluding tobacco); introduction of the option to retire before age 60 for those who began work between age 14 and age 16 and contributed between 40 and 42 years ; introduction of the option to make additional contributions for coverage of years as a student , or years during which coverage could not be credited .
o November 2003 ARRCO (General supplementary retirement scheme) and AGIRC (Management and professional staff supplementary retirement scheme) agreement:
l Contribution to AGIRC will be raised by 0.2 percentage points for employees and by 0.1 points for employers on 1 January 2006.
l No reduction of supplementary pension for employees aged 60 entitled to a full pension.
l Option to buy supplementary pension contribution ‘points’ for coverage of years as a student (70 point flat-rate per year spent in education)
l Renewal of AGFF (Association for the Management of Funds Financing AGIRC and ARRCO) until 2008.
New retirement savings vehicles introduced
The law introduces two new vehicles expressly designed for retirement savings and clarifies the social and fiscal tax treatment of contributions paid to supplementary retirement plans (defined contribution schemes) and supplemental death and disability benefits.
o PERP (Plan d’Epargne Retraite Populaire):
l Individual retirement savings plan,
l Offered by a not for profit entity known as an individual retirement savings association,
l The association contracts with an insurance company, a mutual benefit society (IP) or a mutual insurer,
l Appointment of a prudential committee,
l Life annuity only,
l Capitalisation (euros), deferred life annuity or points,
l An employer may set up a ‘company’ PERP or modify an existing ‘article 83’ to allow employees to contribute on a voluntary basis.
o PERCO (Plan d’Epargne Retraite Collectif) – Mutual Employee Retirement Savings Plan:
l Will replace the PPESV introduced by the Fabius Law in February 2002 but requires investments to be held until retirement,
l An employer must have a PEE (Plan d’Epargne Entreprise or employee savings plan) to establish a PERCO,
l The payment is in form of annuity . Capital payment may occur if a collective agreement makes it possible.
New tax treatment
l Contributions to social security, ARRCO and AGIRC are entirely tax deductible,
l Additional voluntary contributions for coverage of years while a student are tax deductible,
l Former limits: 19% de 8 PASS (Plafond Annuel de la Sécurité Sociale / Annual Social Security Ceiling) for pensions and benefits and 3% of 8 PASS for benefits only no longer apply;
l Introduction of two new exemption limits:
1. Contributions paid to mandatory supplementary retirement plans and employers’ contributions to PERCO will be tax deductible up to 8% of the gross salary limited to 8 PASS.
2. Contributions paid to mandatory corporate complementary benefit programmes will be tax deductible up to 7% of PASS and 3 % of the gross salary limited 3% of 8 PASS (as modified by the 2004 Finance Law).
3. Contributions to a PERP will be deductible up to 10% of the taxable income limited to 8 PASS with a lower limit of 10% of PASS. This tax package includes amounts paid to other schemes (art. 83) or new products (PERCO).
l Employers’ contributions to ARRCO et AGIRC are exempt of social taxes ;
l The former 85% of PASS limit disappears and two new social tax exemption limits are introduced (to be defined by decree);
l Employers’ contributions to supplementary retirement plans and complementary benefit programmes continue to be subject to CSG-CRDS (social taxes levied to finance social security deficits).
Special tax applicable to defined benefits plans
Defined benefits plans known as Art. 39 in which the payment of annuities is tied to the beneficiary’s career in the company, will be subject to a special tax payable to the Old Age Solidarity Fund (Fonds de solidarité vieillesse).
The tax will be levied either on :
1) Annuities settled on or after 1 January, 2001 and paid on or after 1 January, 2004. The rate levied on annuities (on the portion exceeding one-third of the social security ceiling) is 8%.
2) One of the following (relating to fiscal years beginning after 31 December, 2003): Premiums; or A portion of the allocation to reserves corresponding to the service cost or the service cost disclosed in the financial statements.
The rate levied on premiums is 6%. The rate levied on allocations to reserves or the service cost is 6% through 2008 and then 12% starting in 2009. Companies will have to elect the tax basis (ie, annuities or premiums/ reserves/service cost) by 4 May, 2004. This election will be irrevocable. In the absence of an election by the company, tax will apply on both bases.
Annie Miller and Benjamin Oyer, employee benefits, Assurances Saint Honoré in Paris, part of the IBN Network