France has made a significant shift to what could be called a French pension system with Anglo-Saxon characteristics following the acceptance of a new pensions law, officially designated the 20 February 1997 law. In the vernacular, the law will probably be called the Loi Thomas (Thomas Law) after the representative who steered its passage.
The law allows the setting up of official company pension schemes known as Plans D’Espargne Retraite. The predicted value for the French markets is the subject of some debate, although the government has suggested FFr 40 to 50bn per year and many analysts agree, although some estimates are as low as FFr 10bn.
The regulatory framework has still to be clarified, something that has caused a considerable delay to similar plans in Spain, but commentators in France expect the final details to be decided by the summer.
The law stipulates that plans can be set up by employers or groups of employers and must be open to all employees concerned and that they must be created by collective agreement (allowing for variations in benefits and contributions between classes of employees ) or created unilaterally in which case all employees must be offered the same terms. Employer contributions cannot exceed four times the employee contribution each year and are not subject to tax if they remain within a limit of 5% of salary or 20% of the social security ceiling.
Pension funds must be specially set-up entities while pension plans will be supervised by a board with at least 50% employee representation. Up to 20% can be commuted as a lump sum on retirement and benefits and assets can be transferred to another fund without penalty.
A maximum of 65% of assets can be invested in bonds aimed at stimulating the equity markets although this has been greeted with only limited enthusiasm in the asset management industry and there have been suggestions that much of this 35% could end up in the money markets.
Even accepting the highest estimates it will be some time before the financial impact is felt on the French market. However, many of those involved in the French pensions industry talk of a change in direction and a cultural change.
Vincent Vandier, the Délegué Général of AF-PEN, the Association Française des Régimes et Fonds de Pension, the recently formed Pension Funds Association des-cribed the new law as a turning point. The market, he said, is both new and old: the required expertise is present in the life insurance industry which has provided an unofficial tier of retirement provision up till now. The regulations also originate with the insurance code (al-though this could change in the wake of any EU directive) while funds significantly will include an element of assurance of benefits.
The whole process, Vandier said, had been a long one, dating from 1991, having had a hostile response from left wing deputies and trade unions who regarded pension plans as competing with pay-as-you-go schemes”.
As with other commentators, Vandier expected a limited impact on the market in the short term. Setting up the pensions will take time and the corporations themselves will have to set up the plans in agreements with their employees.
The public will also need convincing and his organisation will be involved in the effort to do so. There is, however, a difference between being aware of the issue and deciding to make contributions.
He was optimistic that the law marked a significant change in direction. “For the first time there will be a company-sponsored, savings and investment activity totally devoted to retirement,” he said.
Monique Bourven, head of State Street Banque in Paris agrees that the new law is a turning point, having overcome the opposition of significant vested interests. She predicts that the first plan will be in operation by the end of the year . She stresses, however, that with the restricted asset allocation it bears more relation to continental plans that those of the US, UK or Holland adding that it represents just US$ 1.5bn in equity or two days trading on the Paris stock market
She sets more store by its impact on the psychology of the pensions and investment industry in France: “The market was boosted by the discussion of the law, the institutional investors are more optimistic and all the international community have a better feeling about Paris. There is a positive environment in relation to this issue even though at the beginning it will be a very small flow of money into the market.”
A recent survey, commissioned by Groupe AXA and carried out by consultants Frank Russell in Paris suggested that many French companies would take advantage of the scheme with 69% of the 40 respondents saying that they wanted to launch plans.
A spokesman for Elf, which already runs a complementary benefits scheme for its oil and gas division, said that the company would be considering the setting up of new Plans D’Epargne Retraite for its other divisions. However it was waiting for the regulatory environment to become clear.
Other companies have, however, already taken the decision not to utilise the new legislation, having already made provision for the retirement of their employees.
One such company is Rhone Poulenc. The company agreed an alternative savings plan with the trade unions six months ago. Bruno Bedier, the group specialist in pensions with responsibility for France said that the company had decided, after two years consideration that the compulsory strand would continue to give some protection, but that staff should be compensated for the inevitable decline in its value. “We had a choice between retirement plans or savings plans and we chose savings plans. Staff wanted a lump sum on retirement which is better provided through the savings plan we have adopted than with the new law,” he said.
With the law having survived passage through an at best ambivalent French legislature and with the insurance and asset management industries already geared to providing for retirement, the success of the law now depends on French companies. But it will be some time before it can be determined whether France has really changed direction.