The French have got used to relying on a relatively generous pay-as-you-go system of retirement provision but, as in other countries, this has become increasingly pressured by demographic trends and the limitations of the public purse so new solutions had to be found. Saving for retirement is a new concept in France. The French are great savers – but they like withdrawing their savings too, well before normal retirement age.
Efforts have been made in the past to encourage workers to save for retirement. Legislation passed in 1986 introduced the PEE - Plan d’Epargne d’Entreprise - or company savings plan. While promoted as a way to save for retirement, it nonetheless allows for capital withdrawals after five years, an option which most scheme members use to some degree. The total amount saved in such schemes was just short of E60bn at the end of last year, but with more than 8m savers this is barely scratching the surface in terms of retirement provision.
To address the issue of saving for retirement more specifically the Fillon Law of July 2003 introduced two new long-term savings vehicles.
One of these is the PERP – Plan d’Epargne Retraite Populaire – an individual retirement savings plan for retirement benefits designed to complement an employer-sponsored plan. It is an insurance contract where the payment takes place at retirement in the form of annuity.
The PERCO - Plan d’Epargne pour la Retraite Collective - is a company retirement savings plan. The payment takes place at retirement in the form of annuity or a lump sum. The employer may match the employee contributions up to an annual maximum of €4,600 and three times the employee contribution. Participation in PERCO is only possible if there is also participation in the PEE.
PERCO is still negligible in terms of assets under management. It is estimated that employee savings, comprising both PERCO and the PEE, will amount to €100m in five years’ time, of which PERCO will account for 25%. “This will clearly depend on the level of employee matching,” says Simon Desrochers, partner at the Paris office of Watson Wyatt.
Employer-matching contributions will be key to the success of the retirement savings schemes. “For 85% of workers the important thing in their plan d’épargne is how much the employer will pay,” says Dominique Coudert, development director at Natexis Interépargne, part of the Banque Populaire group and market leader in employee savings schemes in terms of assets under management. “It will be the matching policy of the company which will influence how much the employees pay into this.”
It was with this in mind that the ceiling for employer matching in the PERCO was set at double the level of the €2,300 allowed for the PEE. “This will certainly make funds move to PERCO,” says Desrochers.
In most cases employers match employee contributions based on how much they pay in. According to Arnaud Sanglé-Ferrière, consultant at Hewitt’s’ Paris office, “most employers match at 100% for the first €1,000 of employee contributions, 50% for the next €1,000 and 25% for the next. Employers need to match at a rate of at least 100%, otherwise the employees won’t do it”.
Another reason for the popularity of the PERCO is that company profit sharing paid into the scheme can be matched by the employer. The PEE does not allow for this. “So we see many companies that use this point to encourage their employees to invest in a PERCO,” says Coudert.
A further aim of the new retirement vehicles is to encourage people to work differently. “The true challenge will be to make people stay longer and work part-time,” says Desrochers. “So people need flexibility. The PERCO is flexible – you can receive it as a lump sum, or as an annuity. In the case of a defined contribution scheme the only option is an annuity, hence their poor take-up.”
According to figures from AFG, the French Association of Investment Funds and Companies, PERCO has made very significant progress in the market. By the end of June 10,000 PERCO had been established, both by large companies such as L’Oréal, Carrefour, Sanofi-Aventis and Total, as well as by SMEs.
Many large companies have converted long-term plans into PERCO schemes. PERCO is also popular among SMEs. “The law makes provision for small companies with less than 100 employees, for a director will use this as a tax efficient means of remuneration,” says Coudert. “The larger employers have other objectives – to incentivise their employees, and attract the best talent.”
Lifecycle funds, where the asset allocation is tailored to the age profile of the member, are becoming an increasingly popular form of investment for the new schemes. Natexis Interépargne offers two lifecycle products, one actively managed and one passively managed.
Many employee savings schemes are invested on a simple 50% bonds 50% equities basis. Furthermore, the system of employee shareholders is very well developed in France. There is no limit on the amounts invested in the sponsoring company by schemes that predate the new retirement vehicles. However, in the case of the PERCO, such investments are limited to 10% of the total portfolio. “It was scandals such as Enron which inspired the legislators to impose this limit,” explains Coudert.
She adds: “A little less than half of our employee savings funds are invested in shares of the sponsoring company – both quoted and non-quoted. So we are having to make a big effort to promote the life cycle product.”
The manner in which funds are invested is a concern for Desrochers. “If the objective of everyone, including the government, is to have a proper return then we will need to convince employees to go for riskier assets,” he says. “The real risk is that the funds will not deliver a sufficient return to produce a sufficient retirement fund. Funds tend to focus on short-term volatility. If the PERCO trend stays the same – that is to say very conservative, there will be a shortfall. As it is, the system is a timebomb. The challenge for employers is to educate their employees.”
Most of the players in the market are the major banks with their national distribution networks. Natexis Interepargne sells its products through the Banque Populaire network of 2,500 branches. “By 2007 we want to have 15,000 PERCO,” says Coudert.
Among new entrants to the market are the insurance companies and various retirement provision institutions. Coudert continues: “All the providers try to promote their own investment management. That said, today a big client may have several managers. The managers are mainly French but there are some clients who have started asking for international managers because that is what they have internationally in their overall group. So open architecture is gradually emerging.”
As well as investment management the key area of the market is account management. A law passed in 2003 required that administration and investment management fees be disclosed separately. “The investment management always used to subsidise the account management,” explains Coudert. “Everyone wanting a market share put the fee for account management very low.”
The cost of account management runs at €20 per year but the market charges €5 to €6 on average. “The result is that the tariffs will have to increase significantly,” Coudert notes.
Not all players have the capacity to manage this kind of account. “Like many of the banks, we offer both investment management and account management,” says Coudert. “Some players only want to be present in the financial management but not account admin, so they look for alliances with banks like us, and we now have a number of alliances with players who want to be in this market. The foreign players that have come in do not have the account management so they also have to look for alliances.”
Coudert notes that one in two companies have said they will set up PERCO in two years. “The schemes are always established through negotiation with the unions,” she says. “The capitalisation system is very new. It is a complete cultural change which is a particular challenge for the unions. It is often this hard reality which slows down the process.”
Desrochers highlights the challenge: “The PERCO must be offered to all employees without exception. Most large companies are taking longer because they also have other reward systems so PERCO will have to be tied in to those.”
The reason behind the reluctance of some companies to set up a PERCO is affordability. “The main obstacle is the economic situation – we are hardly in a period of growth at the moment,” Coudert points out.
A recent survey found that more than 80% of companies felt it was their duty to put in place some form of retirement provision scheme for their employees, but that only two thirds would be willing to finance it. Given the importance of employer matching this is not welcome news.
As for the culture shock for the French of long-term saving, perhaps this is less significant than it was. “Today it is very much in the conscience because everyone is talking about it now,” Coudert notes. “So now everyone is saying – ‘I must do something about my retirement.’”