the pension crisis in france causes and remedies pension reform in the european union: comparing the...
TRANSCRIPT
The Pension Crisis in France Causes and Remedies
Pension Reform in the European Union: Comparing the Different National Approaches
Cicero Foundation Seminar16 May 2008
Ephraïm MARQUER DirectorEmployee Savings and Retirement SchemesPrivate Equity and Venture Capital
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Summary
1. Retirement system : Legal context Page 3-8
2. Corporate Pensions Page 9-16
3. Individual plans Page 17-
18
4. Companies and employees’ expectations Page 19-
20
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3
Context : the 3 pillars of the retirement scheme
CA
PIT
AL
ISA
TIO
ND
IST
RIB
UT
IVE
Individual SavingsPlans
Ex : Life insurance, PERP
Corporate Pensions
DefinedBenefitsDefinedBenefits
DefinedContributionsEx : PERCO
DefinedContributionsEx : PERCO
State PensionState Pension ComplementaryRegimes
ComplementaryRegimes
Compulsory
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Context : compulsory regimes
State Pension
Beneficiairies : private sector employees and independant workers
Common features : Re-distributive regimes Contributions and retirement revenues based on a legal « limit » - the PASS
(and not on salaries) Minimum pension equivalent to about 30 % average earnings Target replacement rate of 50 % after 40 (and progressively 45) years
Complementary (Mandatory occupational) Regimes
Beneficiairies : same as state regime
Common features : Re-distributive regimes Based en retirement « points » which depend on level and duration of
contributions
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Context : in 28 years, a decrease of 7 years in the length of working life
5Source : FFSA
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Context : main difficulties facing French retirement system
Financial deficit of the compulsory regimes due to demogaphic factors
Many reforms during the last 10 years, aiming to : Raise individual contributions Reduce replacement rate
Creation of 2 institutions : FRR (Fonds de Réserve des Retraites / Pensions Reserve Fund) ERAFP (Etablissement de Retraite Additionnelle de la Fonction
Publique / Civil Service Additional Pension Scheme)
<15 years 15 to 64 years 65 and plus
In 1950 22,7% 65,9% 11,4%
In 2006 18,8% 65,3% 15,9%
Forecast 2050 15,9% 57,7% 26,4%
Evolution of the French population's age structure
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Context : main issues facing France
reduce the portion contributed by the 1st pillar, while encouraging the
development of the 2nd and 3rd pillars
0%10%20%30%40%50%60%70%80%90%
100%
Nowaday Tomorrow ?
Distributive Corporate Pensions Individual Plans
What tempo ?
Future allocation ?
To what extent ?
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Context : the FILLON Law of 2003
To encourage private retirement savings Creation of the PERP = a « Group » self invested personal pension,
available to all individuals
To encourage companies to contribute financially to employee’s
retirement Creation of the PERCO = a DC Corporate Pension scheme
To implement favourable fiscal regime for employees/individuals
and companies
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Tax benefits = essential for the developementof private retirement schemes
Companies
exemption from tax& social security charges
Companies
exemption from tax& social security charges
Individuals
« unique » tax regime for corporate& personal retirement plans
Tax exemptions
Individuals
« unique » tax regime for corporate& personal retirement plans
Tax exemptions
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Corporate Pension : PERCO (1/6)
Implemented in a company or group of companies, after negociations with
the union representatives
Beneficiaries : all employees on condition of meeting criteria related to the
length of service (minimum 3 months) Including directors of companies of 1 to 100 employees
Financing Amounts paid to employees out of corporate profit sharing schemes Voluntary contributions by employees, limited to 25 % of gross annual
remuneration including performance-related bonus Possibility of transfer of assets out of a PEE (short term corporate savings plan) Days saved on a CET (time related savings plan) Additional voluntary contributions by the company
• A maximum of € 5,324 not exceeding 300 % of employee contributions• May also be applied to assets transferred from the PEE
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Corporate Pension : PERCO (2/6) Investment supports = mutual funds (FCPE & SICAV)
At least 3 products with different risk/return profiles Product must not hold more than 5 % of company stock Obligation to propose a « solidarity » fund
Access to the savings fund On retirement But early redemption is possible
under certain circumstances
Employees have a choice of 2 exit options (defined in the company’s agreement) Life annuity,
• subject to tax, level of taxation depending on the beneficiary’s age at the time annuity is liquidated
• Subject to 11 % levy (reduced to 4,4 % if annuity is liquidated between 60 and 70 years)
Capital withdrawal, subject to 11 % levy on capital gains
The purchase of main residence is an early
avaibility case
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Corporate Pension : PERCO (3/6)
Company’s policy of mark-ups is often more highly structured than
that of the Employee Savings Plan (PEE)
Distinctions made based on contribution sources : Some companies encourage employees to invest earnings from profit sharing
scheme in the PERCO On the other hand, some offer a higher contribution rate on voluntary
contributions
Can sometimes offer more incentives for younger employees
Often offers more incentives for small contributions (decreasing rate per
tranche) but an ultimate longer tranche to encourage larger contributions
from executives
No distinctions made in terms of investment products
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Corporate Pension : PERCO (4/6)
KEY ADVANTAGES No social liability in the employer balance sheet
Governance of funds : dual representation supervisory board
Security :
Safekeeping (segregation of assets, separation of functions)
Diversification of assets
Portability :
Assets marked to marked
Seamless transfers from one plan to another
Efficiency :
No bond bias in asset allocation due to accounting rules or asset liability constraints
Standardization and use of existing infrastructure for economies of scale
Cost effectiveness : funds of funds, multi-company funds, standard UCITS
Flexibility :
Different investment options for different individual risk profiles
Transparency on costs and other information
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Corporate Pension : PERCO (5/6)+ 84 % in 2007
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PERCO's accumulated assets
0
200
400
600
800
1000
1200
1400(€
, mill
ion
)
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Corporate Pension : PERCO (6/6)
1402 million euros by end December 2007 (77 at end 04,
329 at end 05 and 761 at end 06)
PERCOs are offered to more than 1.3 million employees
in more than 56 000 firms
More than 330 000 employees have already joined,
investing on average 4 200 euros
Life cycle funds are the prefered choice of half of the
employees
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Corporate Pension : PERE
Implemented in a company or group of companies, after negociations with the union representatives or upon decision of the company
Beneficiaries : all employees or one/several defined category of employees These pensions schemes are frequently « reserved » for managers
Contributions limited to a % of employee’s salary : Company contributions are compulsory Employee contributions = can be compulsory if so defined by the PERE’s
agreement Additional voluntary employee contributions, limited to 10 % of the gross annual
remuneration (max = 8 x PASS) Funds Management :
Must be managed by an insurance company Assets denominated in euros (or free of foreign exchange risk) Market risk progressively reduced as individual approaches retirement age
Exit option Upon retirement only Taxable life annuities
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The PERCO and other occupational schemes
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Occupational schemes in France in 2006 : € 170 billion
PEE (Employee Savings Schemes)
49,4%
DC Collective life insurance (article
83)20,0%
DB Collective life insurance (article
39)13,9%
PERE0,1%
Civil Service DC Schemes
(PREFON, COREM, etc.)7,0%
Madelin's Schemes6,6%
PERCO0,4%
Other contracts2,6%
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Individual plan : PERP
Individual retirement plan Beneficiaries : all individuals Financing : voluntary contributions, limited to 10 % of
remuneration (max = 8 x PASS) Funds Management :
Must be managed by an insurance company Euro denominated assets ( or free of forex risk) Market risk progresively reduced as individual approaches
retirement age
Exit option Upon retirement only Taxable life annuities
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Scope of saving/retirement plans for individual
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Question : re-balance the weighting of each product ?
Acquisition of
Residential Real Estate
Life Insurance
Corporate pension schemes
PEE
PERE PERCO
Individual retirement plans
PERP
Madelin
deductible, within a unique tax limit
> € 1.1OO billion ~ 35% of individuals savings
< € 18 O billion
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Companies’ expectations
Corporate Pensions are an essential item in the overall HR package and are increasingly seen as a solution to the following problems : Building employees / executives loyalty Attracting experienced executives, aware of the diminishing benefits of
mandatory regimes
Companies require schemes that are : Adapted to their goals in term of the scope of beneficiaries (executive directors,
executives, non executives, etc …) Most (tax ..) efficient for the targeted group of beneficiaries
Furthermore, implementing a corporate pension scheme may : Improve the social climate within the company Help to forge an image of a cohesive group and strengthen corporate culture
The finacial impact of unfunded corporate pensions has become a major concern for listed companies (IAS standards)
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Employee expectations
To be given definitive and « transferable » rights (especially for younger employees)
To continue to benefit from company’s contributions, irrespective of the company’s performances
Acces to complementary income during retirement Maximise the efficiency of their personnal savings plan,
which implies that the following be taken into account : Contributions of the company Tax benefits on voluntary contributions Tax and social levies on annuities (or capital withdrawals)
Right to transfer savings accumulated on death (as annuity or capital)
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