France's strong tradition of state-delivered pensions provision means the PERCO occupational pension saving approach will require a change in attitudes, say Jean Canel and Thierry de la Noue
In 2003 the government introduced a new vehicle, the plan d'epargne retraite collectif (PERCO) to support retirement savings. As it is so new it is perhaps a little early to pass a judgement but there are many positive points in its favour, notably that it is tax effective and benefits can be paid as a pension with a lump sum option.
However, it is only one of a battery of vehicles and plans that are available in France and its usefulness in meeting the challenge of providing retirement income to the French workforce is directly related to the extent to which employers make contributions. The maximum employer contribution is €5,150 per annum but very few companies contribute at this level.
A further limitation on the PERCO's usefulness for companies that may wish to differentiate between different employee groups and focus their contributions on particular sections, for example management, is that a PERCO must apply to the all of a company's workforce and on the same terms.
However, in 2007 all companies with a salary saving plan (PEE) were required to at least open negotiations to offer a PERCO. The aim is to extend the PERCO to most companies and as many employees as possible.
We are at the start of the PERCO's development and, with assets under management currently at €1.4bn, it is insignificant compared with the approximately $15trn (€9.8trn) of assets within the 401(k) universe in the US. Of more interest perhaps is that assets under management in PERCOs are increasing strongly, having nearly doubled from €760m at the end of 2006 and just over €300m a year earlier.
Given the clear need for such a vehicle, one might be forgiven for wondering why it has taken so long to introduce; indeed, discussions on such a vehicle began in the 1990s. In effect this relates to the concern of the trade unions and other stakeholders that an over-reliance by the current and future working generations on external funding might lead to a reduction in support for the mandatory pension systems. This would break the traditional ‘solidarity between the generations' that has traditionally underpinned the mandatory French pension systems. Therefore, externally funded vehicles such as the PERCO were treated with suspicion and their introduction was delayed.
Asset allocation within a PERCO typically operates in one of two ways: either automatic allocation or free personal choice. The automatic allocation, set up by default, aims to safeguard the assets of the employees approaching retirement in order to have these assets maintain their full monetary value at departure date. This is a very conservative way to manage funds but it does fit a population that for generations has not been educated about to how to finance its own retirement, relying on generous mandatory plans. The range of funds for personal choice currently generally includes only three funds: one for equity, one fixed income and one cash.
In future, the increasing sizes of PERCO assets will enable the use of new types of fund, such as index-linked, target maturity and life cycle funds. For these to be applied appropriately, employees and unions will need to be thoroughly trained and educated to ensure they have a solid understanding of their features.
Because the current market offer of asset management is fairly concentrated in a few major players, newcomers - mainly UK and US firms that are experienced in the field of managing long-term pension plans - are entering the market and seeking to highlight their expertise and extensive track records on the underlying funds offered in the PERCO.
We also foresee an increase in the likely size of the employer contribution given its tax effectiveness compared with direct salary.
In the short term the PERCO is a vehicle for asset management, but in the long term a vehicle for paying pensions. These pension payment services should not be forgotten when selecting a PERCO manager since, in the long run, the administrative service and the level of reporting will be key elements for future retirees.
As such, financial institutions already used to calculating and distributing pensions will be able to leverage this competitive advantage as long as they can prove that they are capable of delivering a high-quality service and can offer convenient asset management. Prime minister François Fillon, who was pensions minister at the time of the PERCO's introduction, was wise to forbid the use of shares of an employee's own company in a PERCO in order to avoid an overexposure to a single concentrated risk. This initiative was partly in response to the Enron scandal; to avoid people thinking that all finance is evil, Fillon built a vehicle that does not bear an ‘Enronian' risk.
However, it is crucial that companies are given greater tax incentives to contribute to a PERCO and that the regulation on salary saving plans remains stable in the long term. The
message on pension savings needs to remain consistent and should be based on a long-term view. Opportunistic laws that might allow savings to be withdrawn should be avoided. Savings withdrawn today mean less money invested in tomorrow's economy and less invested in job creation, which in turn means fewer employees to fund retirement schemes in the future. An optimal PERCO would be a pan-European vehicle that allowed cross-border membership.
Personal funding at the employee level with PERCO is one element in an overall attempt to solve current pensions issues. The foundation of the French pensions system remains the mandatory pensions provided by social security, Agirc and Arrco, with additional funding at the state level from the FRR.
The underlying objective is to maintain an acceptable replacement ratio for future generations compared with what the elderly currently receive. More work is needed to achieve this objective, with anticipated changes being proposed this year.
Jean Canel is a senior consultant and Thierry de la Noue a consultant at Towers Perrin in Paris
Industry view of PERCOs and PERPs
Do the plan d'epargne retraite populaire (PERP), an individual savings plan, and the plan d'epargne retraite complementaire (PERCO), a retirement savings plan in the corporate market that allows employers to match employee contributions, provide a feasible solution to a system with an unsustainable first pillar?
Arnauld d'Yvoire, general secretary of Agirc-Arrco financed think tank Observatoire des Retraites, points out the tax incentive offered by a PERP is not as generous as it appears. "Only half of the French working population pays income tax, and this means tax incentives appeal to only a few per cent of the population.
But the PERCO offers a different advantage. An employer's matching contributions are tax-exempt up to €5,324 in 2008. And while the tax break only concerns taxable workers, the social contributions incentive applies to every worker."
Sylvain Favre-Gilly, BGI senior client relationship officer in France, is convinced that PERCOs will continue to grow rapidly. "However, the vast majority of small companies have not developed them and the challenge is to extend them beyond companies with 500-plus employees. It is important that the government reduces the administrative burden that comes with PERCOs."
However, French politicians are unlikely to pass laws that make it more difficult for insurance companies to offer their pension products as the insurance lobby is very strong, notes Wolfgang Weber, global head of asset management and pensions at pharmaceutical company Sanofi Aventis. "French law is quite restrictive when it comes to, for example, asset allocation in the available pension products such as PERCOs, and this gives the insurance industry an advantage."
Bruno Gabellieri, secretary general of the European Association of Paritarian Institutions, agrees that France's pension vehicles are still in the hands of the French insurance industry. But he notes: "In my view the collective aspect of PERCOs makes them a preferred option over individual savings schemes such as PERPs. And there is always the possibility to reproduce PERCOs on a more global scale that accommodates the transferability of rights as outlined under the European IORP directive."
According to Jérôme de Dax, deputy general manager sales and marketing at Société Générale Asset Management, the best way forward for PERCOs is to enlarge the scope of their beneficiaries and increase their exposure to equities. The only downside is that they could suffer from low-level performance on the part of asset managers. "There simply is no clever substitution for PERCOs as a good supplement to pension funds at the moment," he says.