Waiting for better plans to emerge
The current move by some of the largest French companies to introduce Article 83 defined contribution plans for their employees suggests that they are not prepared to wait for a new pensions law and the products it will bring.
PSA Peugeot Citröen is only the latest of a number of companies to introduce an Article 83 DC plan. Total Elf Aquitaine introduced an Article 83 plan for 18,000 employees in its fuel division in April, while the French subsidiary of Coca-Cola, introduced a plan last December for 2,000 employees. Other companies that have introduced Article 83 plans include SNECMA, the French aerospace company. It has introduced a plan for executives only, while Coca-Cola’s French subsidiary has introduced a two tier system with a 6% contribution level for executives and a 3% contribution level for employees.
François Grimaud, director of commercial companies business at La Mondiale, the market leader for corporate pension schemes for medium or large companies, says: “We have noticed that more and more large companies are putting in Article 83 defined contribution schemes not only for top management but also for all the employees. This is a new market and we have more and companies who want to put such plans in place for the employees.”
Grimaud says the move follows pressure from employees, whose salaries have been frozen following the reduction of the working week from 40 hours to 35 hours. “Employees are now saying they want more money, and many of the large companies are setting up pension schemes for employees as a way of paying more money. It gives the employees money not at the end of the month but at the end of their working life. And of course it costs less money for the employer than a pay increase.”
A company can save up to 30% in salary costs if it contributes to an Article 83 plan instead of paying a direct salary increase. For example, a salary increase of E1,500 a year would require social security contributions (at the rate of 40%) of E600 and tax savings (at the rate of 36.7%) of E770. So the net cost to the employer would be E1,330. A pension contribution of the same amount would require no social security contribution, and would produce a tax saving of E550. The net cost to the employer would therefore be only E950.
Employees have a choice of two products within an Article 83 plan: unit-linked funds and mutual funds. The largest companies have tended to choose unit-linked funds. However, the poor performance of the equity markets over the past two years has encouraged many employers and their employees to choose mutual funds: “Human resources managers don’t want the risk of a revolution in their company so they will generally choose the security of mutual funds, where we guarantee the capital and a minimum rate of return,” says Grimaud.
The prospect of a new pensions law may also have encouraged some companies to postpone introducing supplementary pension plans for their employees, says Michel Piermay, president of Paris-based consultants Fixage. “Companies are very fond of Article 83 plans, because they see it as a good way to complete the French pension system. The problem today is that some companies are asking themselves if this is a good time to launch a new Article 83 plan because of the political announcement of a new pension plan product.”
Much will depend on what sort of pension system the new government intends to introduce, he says. “It is not quite clear yet whether the next pension product will be a personal plan or an occupational plan. If we refer to a recent speech by the Prime Minister, it could be a personal plan product. Article 83 plan is not a personal plan – it’s a plan for the company.”
If the government decides to build on existing pension and employee savings schemes, will it choose the Article 83 plan? Robert Cohen, managing director Schroder Investment Management office in Paris thinks this is unlikely. He suggests that the Article 83 plan is not the most appropriate vehicle for a new pension product. “Article 83 is actually a life wrapper with a high minimum yield guaranteed by the insurance company, and most of the money is invested in bonds. One may wonder if this is the right asset class and if this should be the only asset class to back pension schemes.”
Cohen believes that a better vehicle exists in the PPESV employee savings plan. “One could expect that the new employee savings schemes will be largely open to equities, which I believe will fit better the pension requirements for the younger segments of the workforce,” he says. And he suggest that PPESVs could be transformed from savings to pensions plans by extending their duration and providing the option of an annuity.
Whether or not the government will choose to use either the Article 83 or PPESV as the basis for a new pensions product, one thing is clear. French employees will soon be spoilt for choice in the their options for savings and retirement.