Top 1000: France - Growth for PERCO
PERCO collective retirement saving plans have stolen the limelight in a country where funded pensions are thin on the ground. According to the French Asset Management Association (AFG), the second pillar schemes underwent “robust” growth in 2013, with this trend forecast to continue into 2014.
Assets under management in PERCO plans rose to €8.6bn at the end of 2013, an increase of 28%. The number of companies offering a plan has increased by 20,000 or 11%, to 180,000. This means 1.5m citizens of the French population are now covered by the system.
Gross inflows into PERCOs rose 7% and reached €1.7bn – a quarter of which came from voluntary employee contributions, a third from employer matching and 21% came from profit sharing.
As France has yet to create an IORP-compliant vehicle, the few second pillar pension funds still expect to contend with Solvency II, with its implementation still tentatively expected in January 2016. Solvency II implementation has restricted second pillar pension funds from considering long-term, illiquid asset classes, according to Jean Eyraud, head of investments at EDF and president of the Association Française des Investisseurs Institutionnels (Af2i).
The only noticeable trend among institutional investors has been a shift from relatively expensive German sovereign bonds to French bonds, and a slight move into higher-yielding fixed income investments.
French pension funds remain concerned about Solvency II’s reporting and transparency requirements.
Regulation in summary
• The National Assembly has approved reforms of the pay-as-you-go state pension increasing contribution time periods and contribution rates.
• The country’s second pillar PERCO system continues strong growth as assets increase by 28% to nearly €9bn.
• The government plans to harmonise the pension systems continues, funds begin being singled out for governance reforms.
First-pillar reforms have reached a pivotal point. Pension reforms have been proposed following the European Commission’s call for France to alleviate its substantial fiscal deficit. In early 2013, President Hollande set up the Commission for the Future of Pensions, which is responsible for putting forward suggestions to ensure the sustainability of France’s first-pillar pay-as-you-go system. These have included increasing the mandatory period of contributions, higher contributions and tax rises for pensioners. It has also recommended limiting indexation of pensions in payment.
The National Assembly approved some of the suggested measures in December 2013. The contribution period for citizens born after 1973 has increased to 43 years, compared with 41.5 years for those born before 1956. Public employees will also have to contribute for 43 years.
Contribution rates will also increase; the government allowed for a 0.3% percentage point increase in contributions to be allocated either as a whole from 2017, or staggered between 2014 and 2017.
The government has not sheltered pensioners from the reforms aimed at reducing the country’s deficit, although it did not go as far as permanently limiting indexation of pensions. Instead, an annual increase expected in April 2014 was postponed until October, effectively freezing payments for an additional six months. Additionally, the 10% bonus granted to pensioners who have brought up three or more children will not be taxable, bringing it in line with other pension payments.
The government has also favoured further voter-friendly measures, such as allowing workers in ‘hardship’ industries, such as manual labourers and those working night shifts, to retire two years earlier than others.
It has also said it will look to harmonise the various retirement savings systems, and announced it would take over the Caisse National d’Assurance- vieillesse des professions liberals (CNAVPL) – a scheme for independent workers.
The Court of Audit also singled out a multi-occupation public-insurance pension fund for poor governance, calling for a raft of reforms for it to be acceptable. The Caisse Interprofessionnelle de Prevoyance et d’Assurance Vieillesse (CIPAV) was accused of governance, investment and member-services failures. The Court suggested the board of the pension fund should be entirely replaced by a provisional administrator in the interim.
Laws limiting pension funds from some alternative asset classes, such as infrastructure, continue to frustrate some of the larger schemes. Assets remain heavily exposed to fixed income and institutional allocations to other asset classes have stalled, the Af2i says. Real estate investments, however, are now growing as investors implement allocation decisions made in 2013. Infrastructure and private equity, despite remaining popular with funds, are more time consuming and more complex. Investments could be made this year, as valuations are still currently ongoing.
The impact of the Alternative Investment Fund Manager Directive (AIFMD) has caused some pension funds to look for alternative ways to invest. Some funds have adopted UCITS structures as they look to by-pass stringent liquidity and reporting requirements under the AIFMD. UCITS funds, however, are restricted from investing in longer-term and illiquid asset classes.