IORP opens door but demand is key
The implementation of the IORP directive in French regulation was completed on 23 March 2006. This very short new text went rather unnoticed and, up to now, has not triggered the introduction of new schemes or trends in French occupational retirement schemes.
Employers’ attention has been focused since 2003 on the general law on retire-ment, Loi Fillon, and its numerous implications. French multinational employers are aware of the new opportunities that the directive might offer but the road from expectation to reality still seems to be a long one, even if some aspects of the directive could help them start new projects.
Assets of occupational savings schemes represent €77bn and twice that of defined contribution (DC) plans in the French economy. Indeed, we must take account of PEE (the standard company savings plan) and, since the Loi Fillon, PERCO (Plan d’Epargne Retraite Complémentaire) which is similar to PEE but dedicated to retirement - the French equivalents to 401(k) plans.
Tax deductions for PERCO are twice
as high as those for PEE, and both deductions can be added for each employee. Savings on PERCO are granted when the employee retires and can be paid as a lump sum or converted into a fixed or lifetime annuity.
The PERCO has been growing fast since its launch.
Insured DC plans - for which tax deductions have been improved thanks to the Loi Fillon and PERCO - is the second new tool providing the French market with an IORP-type vehicle.
Implementation of the directive
The regulation is based on 11 articles and is aimed at ensuring compliance with the directive in three areas:
o Insurance regulation
o PERCO regulation and creation of IRPROCO, its dedivated IORP
o Tax, social and labour regulations.
Insurers, including welfare institutions and mutuals, are the only organisations allowed to insure lifetime annuities and for this reason are the only French SPVs in a position to play the role of an IORP.
To facilitate compliance with the provisions of the directive and cross-border activity, provisions have been introduced in each code to which insurers are bound. The main ones are:
o A general and open definition of agreed retirement benefits is provided to avoid any limitation and to accommodate foreign benefits within cross-border activity.
o Assets, liabilities and accounts of an IORP are separated from other assets, liabilities and accounts of the insurer’s other activities.
o Assets are protected in the interest of members or beneficiaries in the event
of bankruptcy of the sponsoring undertaking.
Such provisions were not new to French regulation since some other schemes had already adopted them. For example, there is the latest individual retirement scheme PERP, created through the Loi Fillon, as well as a previous scheme, L-441, whose name refers to the relevant article in the insurance regulations.
Before implementation of the directive, PERCO could not be anything other than a scheme. Apart from considering the record keeper of the scheme as the IORP, the only solution was to allow a PERCO to be administered by a specific entity. This has been the objective of the implementation of the directive, with the creation of the IRPROCO, the dedicated IORP for PERCO. An IRPROCO cannot be an insurer, a bank or an investment manager.
An IRPROCO is allowed to conduct administration in the period before beneficiaries retire and cannot bear biometrical risks. A foreign IORP, located in the EU, is authorised to provide a PERCO and will act as the IRPROCO, and a domestic company wanting to implement a PERCO without a cross-border activity is not bound to contract with an IRPROCO.
The only advantage of an IRPROCO is to allow a company providing its employees with a PERCO to develop cross-border activity.
Changes in insurance codes were made to provide domestic insurers with the ability to conduct cross-border IORP activity and also to assimilate foreign EU IORPs with their French counterparts domestically.
Tax, social and labour regulations determine conditions for eligible schemes. Specifications that schemes must comply with are explained in these texts as well as, for instance, rules on implementation, and information that must be provided. Such provisions result from pthe culture of the country and some of them have deep roots. We could mention, for instance:
o Compulsory participation for employees belonging to an objective category gathered through a general and impersonal definition written in an official collective agreement.
o Excepting for PERCO, benefits must be paid as an annuity and never as a lump sum.
o Excepting for PERCO, the benefits must be insured.
o Provision for individual and immediately vested rights.
o Transfer rights to an other similar scheme when the employee leaves the company.
The implementation of the directive has not changed any of these provisions but has recognised foreign EU IORP as a provider for such schemes.
Where now for IORP?
The 2003 Loi Fillon has been an important regulation for the French retirement system, not only to address social security or mandatory pay-as-you-go economic issues, but also to give the economy a global and logical tax and social incentive structure for occupational and individual savings, and retirement schemes.
Even so, the system remains complex because the implementation of retirement schemes sometimes requires more than seven types of regulations. This means that it will be a kingdom of lawyers until it is decided to gather a unique set of code provisions related to occupational retirement or savings schemes.
Faced with a need to develop supplementary funded retirement schemes in France, some senators are discussing the creation of a unique code for occupational retirement schemes. In a way, the enforcement of the IORP directive opens the door.
From our standpoint, success for IORP will come from a voluntary approach on the part of employers, from demand and not from supply, since many issues remain to be dealt with.
For instance, how will IORP deal with the individual benefit record of a migrant employee, even in a DC scheme? In the French implementation of the directive, it is permitted to transfer individual benefits to a similar scheme when employees leave. Regarding French eligibility provisions for tax and social incentives, is it appropriate to merge the benefits of individual technical provisions or assets in the host scheme, or is it better to maintain a separation of records?
It is not certain that the answer to that question belongs with the implementation of the directive in each country.
Denis Campana is head of French retirement business at Mercer
Is there such a thing as a French IORP?
he French market for supplementary retirement or saving schemes is mainly held by insurers, either through individual policies or through occupational schemes, which add up to barely 6% of life insurance assets.
However, France has chosen a pay-as-you-go and high replacement ratio mandatory retirement system. Moreover, the system has been generalised progressively without any possibility to amend the contribution rate, which eventually determines the level of accrued pension.
Nowadays, the contribution rate for ‘cadre’ or managerial employees represents 22-25% of the employee’s salary, up to an annual ceiling of €257,000 and replacement ratios - which are inversely proportional to final salary since the French mandatory schemes can be regarded as career average systems - range between 45 and 65% of final salary.
This situation explains why occupational supplementary retirement schemes are underdeveloped in France, and why the IORP is not an issue. Another barely credible reason used to lie in an unlikely tax regulation, which was waived the Loi Fillon in 2003. Until this new law, tax and social deductions for supplementary retirement schemes were limited to a fixed amount, which was determined taking into account contributions to mandatory retirement schemes.