Work savings plans to grow
The real start in France of pay-related savings plans was a result of moves by General De Gaulle in 1959 when he gave companies the opportunity of providing supplementary compensation to their employees on a variable basis related to the results or success of the employer. This type of scheme is known as ‘Interessement des salariés a l’entreprise’ (interessement).
This was complemented in 1967 by another vehicle that we call ‘Participation des salariés aux resultats de l’entreprise’. In the same year, another kind of employees’ saving system was launched which companies can use if they want, called ‘Plan d’epargne entreprise’.
These three kinds of plans give companies the ability to motivate their employees by giving them higher saving capability, access to expert financial management and access to share ownership schemes. These three together, or more precisely the sums they produce for salaries are known as ‘salary savings plans’.
Some people include in this definition the ‘stock option plans’. They are an authorised way and often used because of their very favourable tax aspects.
Looking in more detail at the three main plans, we will consider first ‘Interessement’.
Created in 1959 and modified since then, this plan is optional for companies but if it is decided to install one, all the employees must be involved. The company has to negotiate with the employees’ representatives the criteria to determine in what terms and conditions plans should be calculated and the basis on which the collective amount, if there is one, will be shared between employees.
An agreement is put in place for three years and the amount is immediately available. The employees can decide if they want to either take their portion, in which case they have an exemption for social contributions but must declare for taxes the amount received, or put their share in a plan de epargne for at least a five year locked-in period, when they obtain a total tax exemption up to about FFr80,000 per annum. In any case, the company is exempted from social contributions on these amounts and can deduct these from his profits before taxation.
More than 15,600 contracts for ‘interessement’ were in force at the beginning of this year, covering more than 3m employees mainly in the private sector, out of some 14 to 15m in total. Some 80% of these received on average FFr5,650 in 1998 amounting to FFr14bn in total. In spite of the considerable tax advantages for the investment of ‘Interessement’ through a savings plan, only 40% of this amount are put in saving plans. Compared with the others, this is a short term involvement scheme.
The second type, ‘Participation’, was introduced in 1967 and has been modified several times since then. Participation schemes are mandatory for every private sector company,which has 50 or more salaried employees, but are optional in smaller firms. Establishing a scheme requires negotiations with the representatives of employees to determine if the formula will be just the legal minimum or an improved model, choosing the asset manager and the other points to be put into the contract, such as criteria for sharing the collective amount. The calculation of the collective amount to be shared between employees depends mainly on the financial results of the company. The participation is regarded as a mid-term profit sharing system, with the money coming from this formula locked in generally for five years.
The advantages for employees and the company are the same as those for, ‘Interessement’, where the investment is in a ‘Plan d’Epargne’.
For as long as the employee leaves his savings invested, he can re-invest the interest and capital gains without tax in the same vehicle. At end when he asks to be refunded, the money he obtains is tax free.
During the ‘lock-in’ period when the money is invested in shares of the company, it is in a special savings account in the books of the company, or in some specialised mutual funds called ‘Fonds communs de placement d’entreprise’ (FCPE).These FCPE can be invested in shares or in bonds of the company, or can be totally or partly diversified .
Nearly 19,000 companies with around 4.9m salaried employees had a contract for participation at the end of 1997, which generated in 1998 an average individual amount of FFr6,000 FF or in total Ffr21bn, equivalent to10% of their net taxable profit, or 4.2% of their global salaries bill.
In ‘Participation’ contracts employees representatives choose the sort of investment they prefer. Commonly, several years direct investment in company shares is chosen for only 2 to 3% of the global amount, special saving accounts investment is chosen by about 40 to 43%, and FCPE by 50 to 55 %. In these FCPEs more than 45% of the amount received is invested in shares of the employing company.
The ‘Plans d’epargne entreprise” (PEE) is the optional system for companies and for employees and was also created in 1967. The PEE can be regarded as a type of money purchase plan, as a means for money management, a very efficient way to have a plan that acquires company shares for employees, and is in fact very often considered as a long-term, general savings scheme .
Implemented by a regulation draft, the PEE is fed by voluntary contributions by employees up to a maximum of 25% pa of their gross salary,including eventually Interessement, and sometimes amounts coming from Participation.
Money invested in PEE is locked-in for at least five years. During this time, employees can decide to invest their money in direct shares of the company (accounting for probably less than 5% of total),or in FCPEs (responsible for more than 90% of total). FCPEs can be invested for participation.
Participation and Interessement invested in a PEE have their own particular incentives as mentioned above. The other voluntary contributions, however, have no specific advantages.
To encourage employees to participate in this scheme, the employer can match the Interessement and other voluntary contibutions by an optional amount up to 300% of the employee’s contribution every year with a ceiling of FFr15,000 per employee. The ceiling can be up to FFr22,500 if a part of the total amount is invested directly or through an FCPE in company shares. For the employee this matching amount is tax and social security contribution exempt, while for the company it is social security contributions exempt and deductible from pre-tax profits. Interest and capital gains are treated as above.
Nearly 9,000 companies have installed a PEE in which more than 1.3m employees have made contributions equal to an average of FFr14,200 in the year, to which an average matching deposit of FFr3,400 was added. Some Ffr19.3bns plus Ffr3.6bns were invested in PEE in 1998 including partly Interessement and partly Participation.
The main characteristics of an FCPE are as follows:
q They can be created for employees of one company
q They can be invested without any diversification of their assets if those are shares or bonds issued by the company itself
q They are controlled by a special body called ‘conseil de surveillance’ composed of employees representatives and often with company delegates .
q About 3,462 FCPE managed by 60 asset management companies with a special agreement, managed FFr375bn at 30 June this year.
q Of these FFr375bn about 45% were invested in companies shares and 3.5% in companies’ bonds, 19% in other OPCVM funds, 23% in shares (15% shares and bonds of French firms), 7% in foreign assets, and 3% in cash and other securities.
Paul Maillard is an adviser with Association Francaise de la Gestion Financière in Paris