Employee savings plans could have been the next big thing in French financial services but they have failed to take off. Alain Lemoine examines why
What could be the Eldorado in French financial services for the coming decades? The question is worth asking if one considers the past Eldorados - the mutual fund industry and the life insurance business - are maturing, if not declining, after astonishing achievements.
At the end of 2008 France was the leader in the European Fund and Asset Management Association (EFAMA) league tables, with total assets under management of about €1.1trn, compared with about €400bn in the UK and half that in Germany. The achievement of life insurance is even greater, with an estimated 12m policyholders, about one in three households, and total assets of €1.14trn.
The successes of the life insurance and mutual fund industries rely on three common factors: a need, a favourable regulatory and fiscal environment, and a competitive offer in a cut-throat market.
Take the SICAV industry. French mutual funds serve many needs, from managing short-term institutional treasury to diversifying small personal savings through pooled portfolios. The regulatory environment allowed the development of a sophisticated industry (master-feeders, funds of funds, structured products, ETFs) with some tax advantages (tax-deferred capitalisation of coupons, dividends and capital gains).
Life insurance has comparable advantages. Retirement planning with death coverage is a must-have product in any developed economy where people start to have enough revenues and assets to protect and transmit to future generations, especially where occupational funded pension schemes are lacking, as in France. The regulatory environment has promoted a constant modernisation of life insurance contracts and many tax exemptions have made it one of the most attractive savings products in France.
The employee savings scheme - the plan d'epargne entreprise (PEE) and the plan d'epargne retraite complementaire (Perco) - could be the French financial services industry's next Eldorado as it shares these two ingredients.
With PAYG retirement schemes facing demographic imbalances and pensions losing purchasing power, there is an obvious need for complementary retirement products. The regulatory and tax environment are as good as they can get, almost any kind of mutual funds can be sponsored in employees' savings plans, and distribution, asset management, administration and custody can be easily articulated between players. As long as it employs just one or more person any employer - global corporation or home office business - can set up an employees' savings plan and benefit from it. Employers can match up to three times employee contributions to a €6,900 a year ceiling - €2,300 for a PEE plus €4,600 for a Perco. Employer contributions are almost tax free compared with more conventional compensations such as wages. For employees, interest and capital gains are almost tax free after five years in the PEE, or shorter periods when, for example buying a house, changing job, a wedding or a divorce.
But although their specifications are just as good as, if not better than the 401(k) pension plans in the US, they have not yet experienced anything like the same success. Few companies offer them and fewer employees feel induced to save with them; employee savings mutual funds (FCPEs) manage less than €40bn, of which Percos represent less than €2bn. Employees' savings schemes are available in about half the large corporations (with more than 500 employees), a third of mid-sized companies (250 and 500 people), less than a quarter of small enterprises (100 to 250), one in eight for businesses with 50 to 100 employees, 6% for small businesses with 10 to 50 people and no more than 2.5% for employers with less than nine employees.
If nothing else the figures prove that having a product with a favourable fiscal environment is not enough to develop a huge market.
So what do employee's savings schemes lack compared to French SICAVs and life insurance? The answer is a competitive offer in a competitive market.
Competition was fierce in the French SICAVs market because of information and distribution. Almost from the beginning, more than 30 years ago, the Caisse des dépôts sponsored the creation of a database gathering and disseminating all kind of information on funds, their performance, classification, size and fees. France's first database company, Europerformance (now a subsidiary of Fininfo), gained press coverage for funds, and helped professionals to compete on performance and fund ideas. This helped them sell their relative expertise and bolstered distribution through retail banking networks.
Something comparable happened with life insurance. As in many parts of the world, life insurance in France was a scam; most contracts were all-life mixes of death insurance with huge fees and small savings. By 1970 it had attracted only FRF20bn (€3bn).
So how did it grow more than 300 times in 30 years? In the 1980s some outsiders launched a new breed of pure savings life insurance contracts with more freedom and lower fees. Helped by the press they stimulated competition, which allowed for more comparisons and rankings. Bankers began to bet on bancassurance strategies and within a decade gained a 60% market share in life insurance distribution. That in turn stimulated innovation among insurers to keep up with this competition.
Now look at the employee's savings scheme. Almost none of these ingredients are in place today and the industry is in denial, convinced it does its best and is unfairly treated or undermined by employers, employees and the media. But consider the database issue. True, an effort has been made. From nothing 15 years ago there are now some data covering 400-500 FCPEs. However, there are more than 4,000 offerings on the market.
The argument from providers is that most are dedicated funds for large companies so that information has to be restricted to client's managers to avoid comparisons. Most competition efforts are aimed at capturing captive corporate clients rather than promoting competitive products in an open market. And an employee's savings plan cannot be transferred to another company when changing job.
The official distribution channel is the employer, who rarely allocates resources to follow-up and information dissemination to employees. As a result, there is no real competition on performance or on fees, which are hidden and fat. It is little wonder, therefore that employee savings schemes have attracted little press coverage and almost no public interest.