The Loi Fillon pensions reform introduced in France more than three years ago has changed the French pensions landscape significantly for employers and employees. It clarified the tax and social treatment of traditional defined contribution (DC) and defined benefit plans and introduced two new pension vehicles - the PERCO (Plan d'Epargne Retraite Complémentaire) retirement savings plan and the PERP (Plan d'Epargne Retraite Populaire), also known as PERE (Plan d'Epargne Retraite Entreprise), a tax-efficient individual retirement plan.
The PERCO offers a locked-in savings account, allowing employers to make generous company-matching contributions of up to €5,149 in 2007 on voluntary employee contributions. This is twice as much as the upper limit for PEE standard savings plans.
According to the Association Française de la Gestion Financière, after 30 months
in existence, the PERCO has been implemented in more than 37,000 companies,
covering 1.2 million employees. Some 200,000 employees have already contributed to their PERCOs.
The amount of assets managed under
PERCOs was almost €800m at the end of 2006 and is expected to reach €1bn over
the coming months. While the amount is not yet comparable to the €80bn of assets managed within savings plans, the trend is encouraging.
Watson Wyatt recently surveyed 34 major companies employing 400,000 employees regarding their current retirement provision in France. It found nearly 20% of the companies have implemented a PERCO and 15% are considering setting up one in 2007.
What are the reasons behind the PERCO's success? First, its structure is based upon the PEE, the standard savings plan, which has
for many years been a successful vehicle for French mandatory profit sharing schemes
and gain sharing plans together with their employer-matching contributions. These payments, as well as investment returns and benefit payments, are tax exempt, assuming the benefit is paid as a lump sum after either a five-year locked-in period for the PEE or until retirement for the PERCO.
The PERCO is also a useful tool for employers that have a large amount of flexibility in defining the company matching formula and setting the plan parameters - for example, base and rate applicable, maximum contribution amount per year, the possibility of matching profit sharing and voluntary contributions at different levels.
For employees, the PERCO offers more flexibility than standard DC plans. Contributions are voluntary and employees have the choice at retirement between a tax-free lump sum and an annuity payment.
Historically, most retirement savings were developed through individual life insurance contracts. The total of assets managed by insurers is around €1,000bn, and it is estimated that less than 10% of that is managed through company-sponsored plans.
In 2003 the Loi Fillon introduced a new insurance vehicle, the PERP, which for the first time allowed individuals to contribute to a retirement fund on a voluntary, tax-efficient basis. Each individual can contribute up to 10% of their annual employment income to a PERP. In return for this favourable tax treatment, contributions are locked in until retirement age and then payable in annuity form.
Three years on, there are almost two million PERPs in operation, representing more than 10% of the working population. However, with a total of €2bn held in PERPs, this works out at just €1,000 saved in each PERP on average.
A unique feature of the PERP is that it can be offered at company level, combining employer contributions and voluntary employee contributions. In this form it is known as PERE. Companies with an existing DC plan in place, often referred to as article 83 plans, on the effective date of February 21 2005 are able to combine the voluntary contribution aspects of the PERE with the existing plan. Otherwise a full PERE must be implemented to benefit from tax relief on voluntary contributions. The full PERE is a new type of DC plan with two pillars. The first is a compulsory contribution, either borne fully by the employer or shared between employer and employee. The second is a voluntary, tax-efficient employee contribution.
Contributions to a DC plan (standard and/or PERE) and company-matching contributions to PERCOs are tax deductible, provided the aggregate contribution does not exceed 8% of the annual gross salary, and is limited to eight times the social security ceiling (€32,184 for 2007). While PERPs are well known among employees, the PERE is just beginning its life as an alternative to company-sponsored DC plans.
The PERE does have some drawbacks:
o it is based on PERP regulation. In particular, contributions must be invested in PERP-dedicated funds, leading to a more limited investment choice than for standard DC plans, which have no restrictions;
o in the case of death before retirement, the amount credited through the PERE is payable only as a life annuity and not as a lump sum;
o as for the DC plan, the rate of compulsory contribution must be the same for all employees in a given category;
o the PERE cannot be implemented without a compulsory employer contribution.
In spite of these drawbacks the PERE remains a good alternative to the standard DC plan and as a complement to the PERCO.
There are a number of reasons to be optimistic about the development of the French DC market. For French employees, retirement provision has become a concern. They are starting to realise that the new generation will not be able to support pension payments at the current level.
For employers, the increasing cost burdens of employment justify analysing all the options for tax-efficient remuneration, including retirement plans.
The proportion of companies offering a DC plan is increasing steadily. According to the Watson Wyatt 2006 GIS survey,
35% of medium sized and large companies offer a DC plan. Among large companies alone the proportion rises to around 50%.
The majority of these plans are standard DC plans, but firms are increasingly considering all options for their DC policy and looking to the PERCO and the PERE.
Finally, the 30 December 2006 law covering profit sharing, employee ownership and employee saving introduced two further obligations regarding PEE and DC retirement vehicles. First, all new profit sharing agreements will have to offer participants the possibility of putting profit sharing payments into a savings plan. In addition, for companies that implemented a PEE more than five years ago, negotiations must be conducted between the employer and employees or employee representatives regarding the creation of a PERCO, PERE or standard DC plan.
As a result, employers and employees will have no choice but to contribute to the development of retirement savings solutions. Only time will tell whether this will be sufficient to create a true market for corporate pensions in France.
Jean Kimmel is the benefits practice leader at Watson Wyatt, Paris