Waiting for a breakthrough
Investment consultants has seen little change since the 2003 reforms but actuaries find business is booming, says Rachel Fixsen
A decade ago, there was very little business for pensions consultants in France. But while since then the sector has certainly expanded, the growth has been somewhat restricted, according to Samuel Raoul, consultant at Bfinance in Paris.
Half a decade on from the 2003 pensions reform, the Loi Fillon, the development of France’s pensions market has fallen short of the expectations that had been raised in some quarters of the industry. The reform paved the way for an increase in funded pensions provision by giving the sector some of the tools that were needed, but progress has been limited say some pensions consultants.
“Many foreign managers and investment companies were expecting a benefit system similar to pension funds in the UK to appear in France at the corporate level,” says Raoul. “At the moment, only large companies, those listed on the CAC 40, have created that kind of system for their employees. But it is not an open system; it is controlled by the banks and is not open for companies to create pension funds and invest in the way they can do in the UK. Companies set up a scheme and choose a custodian and a bank to administer the assets. Since most of these schemes are still quite small, they don’t want to complicate their arrangements too much.”
The tools for the establishment of new DC pension schemes are now available in France as a result of the 2003 pensions reform, though development of the sector is slow, says Guillaume Leroy, (pictured left) partner at Paris-based consultancy Winter et Associés. “The old defined benefit (DB) schemes are gradually disappearing, and new schemes are being set up from time to time by corporates, but at the moment they are very small. And 2008 is the deadline for the end of these old DB schemes, which have been reduced in size over the last 10 to 12 years. In the meantime, companies are trying to get rid of their liabilities by moving the pension schemes into insurance contracts.”
Leroy says many of Winter et Associés’ clients are pension schemes that have liabilities to cover. But there is little ongoing adjustment in investment for the consultancy to help with. “It is business as usual. There are some shifts between asset categories, but no major shift in investment patterns; it is more a gradual evolution.”
The revision of the pensions law as a result of the Rendezvous with Pensions may bring changes to the way the French public arrange their pensions, but until then, Leroy says, there are only minor tweaks to pensions investments for consultants to oversee.
“As far as we can see, there are no major changes ahead in the investment policies of our clients; they set up a plan, make choices about the asset allocation and then stick with this. Within global pensions law there might be some changes in the tools that can be used, but right now we don’t know how this will turn out,” he says.
“For the time being there’s very little investment in the PERCO, the company savings plan for retirement introduced as part of the reform, because it’s not mandatory,” says Leroy. “PERCOs are individual arrangements, and separate from any group pension scheme an employer may offer.”
However, he believes corporate pension schemes may yet become more adventurous in their investment as they mature. “There may be changes in the instruments company schemes use within their defined contribution (DC) schemes.”
But growth of the new DC schemes is slow, he adds. “There are some new corporate schemes, but these are basically insurance contracts. In France the pay-as-you-go system is dominant.”
However, the pay-as-you-go caisses de retraites, which form part of second pillar, increasingly want to develop asset management capabilities alongside the logistics of balancing contributions from workers with pension payments to those in retirement, says Raoul.
“They are trying to diversify their activities because of an awareness that the pension system will be more difficult in the future. They know that though there is a surplus being generated each year - with the large number of people now working - it will decrease at a rapid pace each year, and in 20 years it will be spent. So they are trying to sell other products, such as insurance contracts. These can be compared to the offering of a classic DC pension scheme, although they are at the individual level.”
But there has been some increase in business because of mergers between the caisses de retraites and in the insurance world, Raoul says. “As they become bigger, they are trying to become more professional and to diversify more. They are managing more assets and have become more sophisticated. They are starting to look outside France to see how pensions are managed in other countries. It’s a phenomenon you don’t see in small institutions.”
And geographically, the caisses de retraites are more diversified than they are generally perceived to be. “People say they are not diversified into international markets, but the caisses de retraites do use the euro-zone as their home market,” Raoul adds.
However, Solvency II legislation and other regulatory issues have boosted the need for actuarial consultancy services, says Leroy. “The situation is pretty good for actuaries, but not so good for the companies that want to hire them,” he says.
“The emergence of new systems, new reporting standards and new issues has led authorities and companies to ask for more actuarial services,” says Franck Chevalier, (pictured right)managing partner of Ernst & Young Global Actuarial Services in France.
“Change in European regulations within the insurance sector modifies the role of actuarial consultants. The business environment is changing in several ways, for example, new personal or collective pension funds have been set by law requiring a statutory audit by an actuary every five years. The new regulatory environment - particularly IFRS - has created the need for more advanced financial modelling and comparability between European countries, and clients need specific advice about the consequences of the frequent changes in French pensions regulation,” he said.
“Actuaries in France are having to deal with the both the financial aspects of the 2003 pensions law and the annual changes made to the law since 2006, as well as the aspects which relate to human resources management. International groups have a real concern about pension matters in each country where they are located. They require more actuaries to audit changes in regulation, in mortality trends, impacts and changes on key assumptions, especially related to financial market information in different areas.”
Keeping seniors in harness
The French government is putting measures in place to retain the older employees in the workforce. The 2003 reform encouraged employers with collective agreements not to retire employees before the age of 65 but it was still possible to do so. But under the 2007 Social Security Financing Law it will no longer be possible after 2014.
“Before this, the retirement indemnity, a lump sum payable to the employee on retirement, was mainly exempt from social taxes, even if the lump sum was higher than it would be in the case of voluntary retirement,” says Cecile Darche, director at Premium Consulting.
“However, the new law has gone further; from 2008, workers still have the right to retire before they are 65, but if their employer makes them do so, the lump sum will be taxed 25% this year, and 50% after 2008. Employers will not want to put people into retirement if it’s very expensive to do so. This will have a big impact on their liabilities, and they will have to take this into account - either increasing their liabilities by 50% or changing the way their staff retire.”
“In 2010, involuntary retirement before 65 will not be possible at all,” says Bakoma Mawaya, actuary at PricewaterhouseCoopers in Paris. At that point, even when an employer puts an employee into involuntary retirement after age 65, the indemnity will still be taxed at 50%, drastically increasing the company’s tax burden.