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France: Sprucing up supplementary savings

A new law seeks to boost the attractiveness of pension scheme savings vehicles 

Key points

• The PACTE reforms are designed to promote business growth in the country and channel more financing into SMEs
• These reforms also aim to make lifecycle fund management the default for all retirement savings products
• The government is hoping to make pension pots portable in a bid to foster career mobility
• In the coming year the government is expected to put forward proposals to simplify France’s statutory pensions system

Substantial pension reform is in store on two fronts. One involves the mandatory, mainly pay-as-you-go-financed public system and the other the voluntary supplementary pension plans that can be put in place as part of a company’s social protection package or subscribed to individually.

The take-up of retirement saving schemes is low in France. According to the government, there are €220bn of assets in retirement savings products versus €1.7trn in life insurance and €400bn in regulated savings deposits. It has a target to increase retirement assets to €300bn by 2022.

The reform of these schemes is at a more advanced stage than that of the mandatory pension system, with the French parliament due to debate the relevant legislation, known as loi PACTE, in September. PACTE stands for Plan d’Action pour la Croissance et la Transformation des Enterprises – an action plan for business growth and transformation – and captures the legislation’s aim to support business growth in the country and channel more financing towards small and medium-sized enterprises. 

The bill was officially presented to the cabinet in June. It covers several areas, with reform of retirement saving arrangements forming one part. The overarching objective is to make these vehicles more attractive.

There are four main retirement savings products: PERP and Madelin plans are retail products, while PERE – sometimes also known as an ‘article 83’ plan – and PERCO schemes are collective, company-sponsored defined contribution plans. 

One of the main intentions of the PACTE reform is to unify these vehicles. The plan at the time of writing was for this to occur via the introduction of a new wrapper – Plan d’Épargne Retraite. As it stands, the draft PACTE law foresees a new framework being introduced under the monetary and financial code to define the rules applicable to schemes under this wrapper. 

Key terms would be aligned, with one of the main changes being to introduce the option to take accrued savings capital as a lump sum. Currently the only retirement savings product that allows this is the PERCO. Exiting with a lifetime annuity is to remain obligatory in a PERE in relation to savings accrued on the basis of mandatory contributions.  

The PACTE reform also aims to make lifecycle fund management the default for all retirement savings products. That should allow for greater long-term investment in equities to support the domestic economy and generate higher returns for savers. Lifecycle management is currently only offered under the PERCO.  Tax incentives for employers investing a minimum amount in SMEs are also expected to apply.

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The government is also aiming to make pension pots portable in a bid to promote career mobility. At the moment savings can only be transferred within the same kind of plan but not from one vehicle to the other. 

Under the new Plan d’Épargne Retraite framework each type of retirement savings vehicle would need to offer three compartments to allow transfers and reflect differing tax treatment. The compartments would be for voluntary payments by the plan-holder, compulsory employer and employee contributions in the context of mandatory group insurance contracts, and employer payments made from employee savings plans, such as profit sharing.

The government has said there would be no transfer fees if an individual had been subscribed to a product for five years, and a cap of 3% of assets under management if the product was held for a shorter period.

The PACTE reform also aims to increase competition between providers so asset managers will be allowed to distribute products besides the PERCO and life insurers will be allowed to offer PERCO contracts. 

The plan is for the PACTE law to come into force next year, although specific provisions may only be set out in implementing legislation. The bill empowers the government to implement the EU portability directive.

Reform of France’s statutory pension system is also in the pipeline, with President Emmanuel Macron having made this one of his election pledges. 

The aim of the reform, Macron says, is “to clarify and stabilise the rules of pensions, once for all, by setting up a universal system, fair, transparent and reliable, in which everybody benefits from the exact same rights”.

This is no mean feat given the complexity of the system, which counts at least 35 different compulsory regimes. A 2018 European Commission pension adequacy report described the system as “particularly hard to interpret given the wide range of rules” and featuring “disparities in pension rights and contribution efforts [that] are difficult to reconcile with the notion of national solidarity that nevertheless constitutes its foundation”. 

Reform proposals are expected next year. Macron has said that the law would be applied from 2025, and that some pension schemes would need more than 10 years to implement the transition to a new system.

A public consultation launched in June by the high commissioner for pension reform, Jean-Paul Delevoye, will end in October. 

French schemes commit to responsible investing

The 2017 annual reports of some of the largest French pension schemes have underlined their commitment to socially responsible investment (SRI).

Announcing its results for 2017, Ircantec, the €10.9bn mandatory scheme for non-tenured state, hospital and local authority employees – and other categories of public workers – highlighted steps it had taken in relation to climate risk. 

It had worked on evaluating the emissions associated with its investments to measure its alignment with the goal of keeping global warming to well below 2°C above pre-industrial levels. 

This indicated that emissions associated with its equity and corporate bond holdings are compatible with a 2.5°C increase. That is 0.5°C above the target for 2050 in the United Nations’ Paris climate change agreement of 2016. The scheme was already considering how to accelerate the reduction in the emissions associated with its portfolio. 

Ircantec also noted that it had decided to give itself the option of voting against the re-election of a company chair or chief executive if an investee company did not demonstrate a credible energy transition strategy. 

ERAFP, the €28bn pension fund for civil servants, said it returned 5.5% in 2017 and 6.6% over five years, a performance that “reinforced our conviction that there is a positive correlation between socially responsible investment and financial performance for a long-term investor”.

ERAFP said it was focusing on better assessing the effects of its SRI policy, particularly in terms of the “social and environmental productivity of its investments”.

Earlier this year the €36bn Fonds de Réserve pour les Retraites (FRR) said it wanted to increase its allocation to impact investments and that it would be putting a mandate out to tender in connection with this. 

The reserve fund has also placed more emphasis on integration of environmental, social and corporate governance considerations in relation to other investment mandates. 

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