Filling in the gap
The growth of third pillar defined contribution schemes in France has been hampered, historically, by the generosity of the country’s first and second pillar pension systems. The combination of a high level of social security pension and the complementary ‘repartition’ (pay-as-you-go) schemes of ARRCO and AGIRC – mandatory for all wage earners – has meant that employees can expect a replacement rate of between 50% and 70% of salary.
However, this will change in the future. The replacement rate is expected to fall slowly but steadily over the next 40 years. This will affect some employees more than others.
Michel Piermay, president of Fixage, the Paris-based consultant actuaries, says: “The replacement ratio is not bad for the people on average incomes. But it is becoming worse for richer people. It is clear that executives need something else if they want to have a sufficient level of retirement benefit.”
Defined benefit (DB) schemes are unlikely to provide the answer. In supplementary DB plans vesting rights are lost if an employee leaves or is dismissed. DB schemes also represent, as they do elsewhere in Europe, an open-ended cost to companies. “The move is quite clear by companies first to outsource the previous DB system to an insurer and then to develop a new defined contribution (DC) system,” says Piermay. “Companies can limit their risk giving the business to a life insurance company because the insurer rather than the company is giving a guarantee.”
One DC option open to employers is an Article 83 plan (the number refers to the respective article of the General Tax Code) a system introduced in the 1980s. Article 83 plans are collective defined contribution schemes that are mandatory for a particular category of employee. Both employer and employees contribute, and contributions are vested individually. The company has no pension liability.
The advantages of Article 83 plans are that rights are vested as soon as the contributions are paid to the insurer. If an employee resigns or is dismissed these rights can be transferred to other employers, provided they operate similar schemes.
The disadvantages are that contributions can be converted only to an annuity – no lump sum payment is possible. It is also not possible to pay additional contributions, and tax advantages are phased out above an annual salary of E120,000 when contributions are treated as income.
For these reasons, Article 83 plans have been under-used until now. The market for Article 83 plans in 2000 was worth only E1.3bn in contributions to insurance companies, with total reserves of E18bn according to figures from the Federation Française des Sociétés d’Assurances.
The other alternative is the company saving plan, the Plan d’Epargne Entreprise (PEE), a company savings plan similar to US 401(k) DC plan, with a minimum investment period of five years. Generally, companies match employees’ contributions, which are exempt from tax.
More recently the Fabius law of February 2001 introduced the Plan Partenarial d’Epargne Salariale Volontaire (PPESV) for companies and the Plan d’Epargne Interentreprise (PEI) for groups of companies. These have a minimum investment period of 10 years.
It has been suggested that a PPESV is, in fact, a pension plan in disguise. Vincent Vandier, executive director of the Association Francaise des Régimes et Fonds de Pension (AFPEN) disputes this: “The PPESV can in no way be considered as a pension fund. It’s objective is saving and not retirement. Its duration is too short, contribution from the employer is linked to a contribution from the employee; tax advantage is linked to an employee’s status and not to the individual, representation of participants is not made on the basis of one man one vote and the investments are not managed by an institution dedicated to the PPSEV.”
However, some see the PPESV as the most appropriate vehicle for a new pension product. Robert Cohen, the managing director of Schroder Investment Management’s office in Paris, says: “The new savings products have a strong merit. Firstly they exist. Second, the putting in place of such schemes is being done in cooperation with the trade unions. This is quite important.”
Unions have endorsed PPESV and PEI and their products collectively. Recently, as part of their labelling system, an inter-union committee on employee savings chose products from seven employee savings providers to recommend to their members: AXA Investment Management, Credit Lyonnais Asset Management, Prémalliance, Banques Populaires, Group Ionis, MACIF and Société Générale Asset Management. The products were chosen on the basis of price, quality, socially responsible investment and the representation of the interests of employees.
Cohen says the PPESV and the PEI could be converted to retirement plans without difficulty. “If the current government was willing to create complementary funded pension schemes, the easiest route to follow is to use existing schemes and bring some fairly small modifications like introducing annuities and stronger tax advantages for employees’ contributions – then you could really have something very successful which is already in place and which might give French pensions a whole new start.”
However, the repartition system, which the French hold in great affection, is likely to remain the core of France’s retirement provision for the foreseeable future. The main benefit of the DC occupational pensions schemes and employee savings plans – and any new pension plan – will be to give greater choice to employers and their employees, Piermay suggests. “It’s a matter of diversification, and the probable pensions law will continue this with any new products. DC is a diversification rather than a suppression of the present system.”