Huge leap of faith needed
France’s new retirement savings scheme came under scrutiny at a conference organised by AFPEN, the French Pension Funds Association, in Paris recently.
The Forum de l’Épargne Retraite saw concern that France’s two new retirement savings vehicles - one for the individual, the PERE, and one for collective company arrangements, the PERCO, are effectively in competition with the two corresponding - and already existing - life insurance savings vehicles.
The advantage of the PERCO is that companies can match employee contributions to their PERCO schemes up to a limit of E4,600 per year, double the allowance of its life insurance ‘competitor’, the PEE.
The PEE, on the other hand, is a savings plan where the saver can withdraw capital tax free after six years. Jacques Pericchi, president of AFPEN, underlined the psychological challenge: “It is important to note that traditionally life insurance has the main vehicle for saving for the French,” he says.
The French have been used to savings vehicles which allow them to draw cash down before they retire; the prospect of paying money into a scheme which they will not see again until they retire requires a huge leap of faith.”
Of the possibility to draw down capital Christophe Gloser, director of institutional sales at Fidelity’s Paris office said: “This facility is important to the French and so could make the PEE more interesting than the PERCO.”
So what is the real advantage of the PERCO over the PEE? “There aren’t many,” said Gloser. “The main advantage of the PERCO is that it places the retirement debate into the corporate domain; it enables companies to communicate to their employees on the subject of retirement.”
The road ahead will not be smooth. Pierre-Yves Chanu, general secretary of one of France’s largest unions, the communist CGT noted: “The concept of life expectancy makes retirement provision different from savings. So my conviction is that the pay-as-you-go system is the most efficient.”
That said, the launch of the PERCO has been successful in moving French retirement provision to a part pay-as-you-go, part funded system. Some 88% of companies in the CAC40 are in a PERCO scheme or planning to set one up within the next two years. Valéry Jost from the Treasury described the intial progress of the PERCO schemes as “very promising”.
But there is a long way to go. Last year, inflows to retirement schemes, at around E700m, were negligible compared with inflows the inflows into life insurance schemes.
So legislation and company commitment will be needed to encourage further movement of funds to PERCO. “We need companies to promote their corporate retirement schemes aggressively,” Gloser said.
Pericchi noted: “If I am 30 what is the best way I can increase my revenue? It is if my employer doubles my pension contribution. For this reason PERCO will work.”
Oil company Total incentivises its PERCO by contributing E3 for every E1 contribution from its employees, as explained Odile Bouchet, the company’s director of human resources.
So how will retirement schemes gain the edge over life insurance schemes? Gloser suggested that “changes could be made to the fiscal treatment of life insurance schemes”.
In any case life insurance vehicles may lose their attractiveness before long. Gloser continued: “Life insurance products may suffer from a fall in interest rates and may then become less interesting.”
Denis Stainier of Mercer’s Paris office asserted that the competition between retirement savings vehicles and life insurance is not an issue. “They are not in direct competition,” he says. “Their objectives are different. It is an opportunity for companies to fulfill their social responsibility. If companies continue to take this view the vehicles will become more developed.”
He added: “There is much interest from the social partners but it is taking time to get going because employees need to time to become acquainted and companies need time to integrate the schemes in their budgets. The dialogue is difficult because we are talking to the social partners and employees at the same time.”
On the subject of communication there were concerns that the end user is ill-equipped to make the appropriate choices from the options on offer. Jean Echiffre, head of asset management at State Street’s Paris office noted: “With the old DB schemes people put their money in but didn’t understand what they were doing. Now we want to build a different system. If we want the system to succeed we have to improve the knowledge of the end user. As it stands the only criteria the end user will employ will be past performance and we know this is a nightmare. But if things go wrong the asset manager will be blamed because it is his name on the product.”
He added: “The employee must understand his individual profile; only he can know that. And only he can make the effort to improve his financial skill. Why offer a system with choice if you don’t give the end user the skill to make the choice?”
On the European debate, Karel Van Hulle, head of unit of insurance and pensions at the European Commission was keen to highlight the benefits of the pensions directive, which is due to be implemented across the EU by 23 September. “I believe that the implementation of the pensions directive will force member states to rethink their existing retirement systems and make them more efficient - and that can only be positive. Currently many countries place limitations on investments which inevitably limit investment returns. Individual countries should stop restricting the the choice on offer to their citizens and should instead concentrate on creating systems which focus on long-term profitability. The directive will bring improvements here.”
He stressed the importance of competition: “Choice is the way forward. Furthermore there must be transparency in terms of the options that are offered to make possible comparison of the various options. In this way the social partners of one company could move to another fund on the grounds that it offers better performance. There must be competition in a market with so many billions of euros of resources. Funds should organise themselves - those that don’t will inevitably lose business as companies take their business elsewhere.”
Concluding, Van Hulle noted: “No member state can ignore what is happening in other member states. In the Netherlands pension funds already attract companies from other countries, which is bound to bring about change in the way they operate given the differing needs of foreign clients.”
It was also suggested that defined benefit schemes may never be achieved at a pan-European level. Stainier suggested that only the defined contribution schemes will lend themselves to the pan-European format. “It will be too difficult to move the demographic risks of defined benefit schemes from one country to another,” he said. “The most we will see in the case of DB schemes is asset pooling, which multinationals are already using. I do not think that we will ever see fully pan-European DB schemes.”
On a broader level Stainier noted that progress towards pan-European company pension schemes still needs to overcome two main obstacles.
The first lies at the door of Europe’s individual nation states. “There is a lack of clarity regarding the efficiency of cross-border tax mechanisms,” Stainier said. “The tax protectionism of national tax authorities is holding things up.”
But there is also a broader psychological problem. Stainier added: “There is also a social barrier. It is difficult for people to accept the idea of transferring an element of control to a virtual body somewhere in Europe. All countries need educating about this.”
Stainier suggested that the pan-European pension scheme will develop in two main stages. “I can see pan-European pension schemes developing quickly for intra-European mobile employees,” he said. “But for static employees they are further off.”