Retirement savings in France (Study)

· An optional supplementary pension based on the principle of capitalization supplements the basic and mandatory supplementary pensions;

· These collective and individual savings plans offer people with the ability to save the opportunity to build up capital to compensate for the drop in income when they retire;

· In defined contribution plans, the level or rate of contribution is set at the outset when the contract is signed, and it is the amounts paid in that will determine the amount of the pension upon retirement: for example, Article 83 contracts;

· In contrast, in defined benefit plans, the company commits to a benefit amount to be paid to its retired employees upon signing the contract: for example, Article 39 contracts.

The pay-as-you-go pension system in France consists of a basic scheme and a compulsory supplementary scheme, which can be supplemented by optional supplementary pension schemes. These individual or group savings products, which are regulated and dedicated to retirement based on capitalization, constitute the third pillar of retirement: retirement savings.

These group and individual savings plans offer people who are able to save the opportunity to build up capital that will enable them to compensate for the drop in income when they retire. There are group and individual retirement savings products and a hybrid form of individual retirement savings within a group framework. We distinguish between two types of supplemental pension plans: defined contribution plans and defined benefit plans.

Group or individual retirement savings

Supplementary pensions, which are based on the principle of capitalization, complement pay-as-you-go schemes by offering employees the opportunity to supplement their basic and supplementary mandatory pensions.

These supplementary savings can be built up within the company through the PER Entreprises (company retirement savings plan), Article 83, and Article 39.

Collective supplementary pensions are set up within the professional sector or within the company, in particular through dialogue between the employer or its representatives and employee representatives. The collective and mandatory nature ofthese pensions guarantees fair choices and entitles both the company and the employee to social security and tax exemptions. In practice, the company contributes to the employees’ savings efforts; this contribution can be up to the full amount of the contribution and is part of the salary policy in the same way as other benefits such as profit-sharing, participation, provident funds, etc. Finally, the contributions paid by the employee and/or employer throughout their working life are invested in financial investments and are paid out at the time of retirement to pay the pension, in monthly or quarterly installments and/or, more rarely, as a lump sum.

§ Article 83[1]and (PER Entreprises[2]) plans: These are defined contribution plans, i.e., the agreement specifies from the outset the amount of contributions that will be paid by the employer and, in some cases, by the employee. These plans are managed on a capitalization basis and may be set up by decision of the employer, by company or group agreement, or by ratification by a majority of employees in a referendum. Membership is mandatory for the employees concerned. Contributions to this type of plan may be paid entirely by the company or shared between the company and the employee. In addition, employees may make optional contributions that are deductible from taxable income up to a limit of 8% of gross annual remuneration and up to eight times the annual Social Security ceiling. The sums paid into the « Article 83 » contract remain acquired even in the event of departure to another company, and if the new company has a contract of the same type with the same characteristics, it is possible to transfer the savings to the new contract. It is also possible to transfer the « Article 83 » to a PERP. There are options for early release, and when the contract is settled after retirement, the retiree receives a lifetime annuity (life annuity) in addition to the pensions from the mandatory schemes.

§ Article 39 plans. These are defined benefit plans, meaning that the level of the pension is determined at the outset in the contract. The company defines the frequency and amount of the payments it makes on behalf of the employee based on the time remaining before retirement and also sets the expected amount of the pension. Article 39 contracts are most often reserved for a specific category of employees, particularly managers or senior executives, who can only benefit from the savings accumulated if they end their career with the same company. These contracts are managed on a capitalization basis and when the contract is settled, a payout in the form of an annuity is mandatory, with no possibility of early release. It benefits from special tax treatment, which has been significantly increased in recent years. Since November 2010, it has no longer been possible to set up an « Article 39 » contract in a company unless there is already a retirement savings agreement covering all employees, such as a Perco or « Article 83 » contract.

These retirement savings are set up under the PERP (popular retirement savings plan) or under life insurance:

o Life insurance:Insurance contract (not exclusively intended for retirement purposes) taken out on the initiative of an individual (individual life insurance contract) or taken out by a legal entity or company director on behalf of their employees (group life insurance contract). Anyone can take out a life insurance policy; the beneficiary is the policyholder and their dependents. The policy will determine the conditions for building up savings: payment of a single premium when the policy is taken out, payment of premiums at the saver’s discretion after the first payment set by the policy, and regular payment of premiums, the frequency and amount of which are decided when the policy is taken out. There are three types of vehicles[3]: euro-denominated contracts[4], unit-linked contracts, and multi-vehicle contracts. Life insurance contracts have a maturity date, after which they can be redeemed in the form of a lump sum or a life annuity. It is important to note that with this type of contract, the amounts are not locked in and can be withdrawn at any time at the initiative of the policyholder and with the agreement of the distributing bank. In this case, the tax treatment is less advantageous, as the most advantageous allowances only come into effect after eight years of holding the contract, in the form of a tax credit.

o PERP: The popular retirement savings plan is available to all individuals: employees, civil servants, merchants, professionals, etc. These plans can be opened with organizations such as banks, insurance companies, provident institutions, and mutual insurance companies. The PERP is an individual insurance contract designed to provide a life annuity once the subscriber retires. This annuity is in addition to the pensions provided by the mandatory schemes. Payments are flexible, with no mandatory frequency or amounts. Savers can make regular automatic payments or one-off payments to build up their savings. However, the amounts paid in are frozen until retirement, except in a few cases of early release. Like all supplementary retirement savings products, the PERP benefits from a special tax regime.

It is possible to transfer savings from an « Article 83 » or « Madelin » contract to a PERP. However, a PERP can only be transferred to another PERP. The PERP can be invested in euro-denominated contracts or unit-linked contracts, but it is also possible to invest it in diversified euro funds, and the legislator has imposed a requirement to secure the PERP as retirement approaches[6].

Set up under the PERCO/PERCO I/PERCO PLUS (collective retirement savings plan/inter-company) scheme, which is a collective company savings scheme that allows employees to build up individual savings.

• PERCO/PERCOI/PERCO PLUS: The collective retirement savings plan (PERCO) is a retirement savings product that is taken out within a company. and is therefore an employee savings plan that benefits from favorable social security and tax treatment in order to encourage the accumulation of collective retirement savings that will supplement mandatory basic and supplementary retirement pensions.

It is set up within the company by decision of the employer or following collective bargaining. A PERCO can only be created if another employee savings plan already exists, such asa company savings plan (PEE) or inter-company savings plan (PEI). Employee participation in the PERCO is optional.

The amounts paid in are frozen until the employee retires, except in cases of early release. It is available to all employees of the company, but only a minimum length of service may be required in the PERCO agreement.

To build up capital, the PERCO can be funded by:

§ The employee, who may choose to contribute sums from the profit-sharing plan, incentive plan, PEE, time savings account (CET), unused vacation days (up to a limit of 10), or through voluntary contributions.

§ The employer may pay (if stipulated in the company agreement) a matching contribution to the employee’s PERCO, i.e., a supplement to the employee’s contribution, up to a limit of three times the contribution and 16% of the Social Security ceiling. However, this is on condition that all employees benefit from it. In total (initial payment + periodic payments), the company may not contribute more than 2% of the Social Security ceiling per employee per year via the employer contribution.

The sums paid into a Perco are acquired and definitive even in the event of departure from the company. They can also be transferred to another Perco (if one exists) in the event of a change of company. Otherwise, the capital can remain invested until retirement (and if it is not transferred, it is automatically frozen until retirement).

Upon retirement, Perco savings can be received in the form of an annuity and, if the Perco rules allow it, in the form of a lump sum.

There are other savings products reserved for certain professions: Préfon for civil servants and the Madelin contract for self-employed workers, which are briefly described below:

o PREFON-retraite:Préfon is the Caisse Nationale de Prévoyance de la Fonction Publique (National Civil Service Provident Fund), created in 1964 by the CFDT, CFTC, GCG, FO, and CEL trade unions. It offers several social protection products, including the Préfon retirement savings product, which is reserved for civil servants. This product offers a life annuity upon retirement with the option of a lump sum withdrawal of up to 20%. It is managed by a group of four insurers[8]and is taxed in the same way as a PERP.

o Madelin contract: this type of contract is reserved for non-salaried workers, i.e., the self-employed, and operates in a similar way to the PERP. Introduced following the law of February 11, 1994, known as the Madelin law, its objective was to allow non-agricultural self-employed workers (TNSNA) to benefit from supplementary retirement pensions made up of tax deductions on the contributions they pay. They are taken out in a professional context for the benefit of the self-employed worker and their spouse. Retirement benefits are paid in the form of a mandatory life annuity.

Group supplementary pension plans

There are two main types of supplementary pension plans:

A. Defined contribution pension plans

B. Defined benefit pension plan

In a defined contribution pension plan, the amount, level, or rate of contribution is set when the contract is signed, so the commitment is based on the amount of the contribution rather than the benefit. The amounts paid will determine the amount of the annuity or pension that the future retiree will receive. Contributions are invested in financial investments with each payment.

The payout is made at retirement in the form of a life annuity only, and these are known as Section 83 plans. These plans are available to all or some employees and are funded by employer and employee contributions, individual employee payments (optional), and unused vacation days up to a limit of five days.

The amounts paid can be managed by:

1. Contracts expressed in points: where contributions are converted into individual points that entitle the employee to a pension and are revalued each year based on the performance of the financial instruments;

2. Contracts in euros: the company pays employee and employer contributions into an individual account that generates interest in euros;

3. Unit-linked contracts: contributions are paid into funds denominated in units of account, the value of which depends on the performance of the financial instruments

These plans are managed administratively and financially by an insurance or provident institution and do not create any social liabilities [9]for the company. These plans offer tax advantages: for employees, all contributions are exempt from income tax. For employers, the entire contribution is a deductible expense from their taxable income. However, the life annuity paid upon retirement is subject to income tax.

In defined benefit pension plans, the commitment is made on the amount of the benefit, i.e., the pension at the time the contract is signed. These are « Article 39 » plans. The amount of the company’s commitment (professional branch, or group, etc.) is linked to the employee’s remuneration and seniority. However, this amount does not depend on the level of previous contributions. These plans are more suited to employees approaching retirement, as they involve contingent rights that are conditional on the employee still being with the company at the time of retirement. In some companies, they may supplement defined contribution plans.

There are two types of defined benefit plans:

1. Differential plans, also known as « top-up pensions, » where the employer commits to an overall pension level for all pensions combined, often calculated as a percentage of salary. When the employee retires, a differential is calculated between the overall pension level and the total amount accrued under other basic and supplementary plans. It is the amount of this differential that will be paid under the defined benefit plan.

2. Additional plans where the employer commits to paying a supplementary pension calculated as a percentage of the employee’s final salary and, in some cases, based on the employee’s length of service. The amount paid is independent of other amounts received under other basic and supplementary pension plans.

With this plan, the company creates a social liability (because it commits to paying a benefit to the employee) and the company can entrust the administrative and financial management to pension or insurance organizations. For tax purposes, all of the employer’s contributions are deductible from taxable income but are subject to a specific tax[10]. For the employee, the life annuity at the time of retirement is subject to income tax.

Conclusion

The mandatory pension scheme will not be able to finance the pensions of future generations at the same level as previous generations. The weaknesses of the current system result from structural demographic imbalances such as the decline in the birth rate, the aging of the population and, in particular, the increase in life expectancy, but also from cyclical factors such as the slowdown in growth. These individual and collective supplementary pension products can supplement basic and mandatory supplementary pension schemes. They are all optional, based on the principle of capitalization, and accessible to people who have the ability to save. They offer the possibility of building up capital that will make up for the drop in income when people retire.

· White Paper « Retirement Savings, » AFG 2016

· Didier Le Menestrel, Damien Pelé, « Retraite, bâtissons notre avenir » (Retirement: Building Our Future), Editions Cherche Midi, June 2015

· Technical Center for Provident Institutions (CTIP), « La retraite supplémentaire collective des salariés » (Supplementary collective retirement for employees), September 2013

· Ingrid Labuzan, « PERP or LIFE INSURANCE: which to choose for your savings? », Que choisir.com, January 2015

· Christian Bourreau, « The three pillars of retirement and the case of France, » Courriers des retraités, December 2012

· Franck von Lennep, « The replacement rate of salary by retirement income is decreasing over the generations, » DRESS, July 2015

· AFG « Association Française de la Gestion Financière » (French Financial Management Association), http://www.afg.asso.fr/index.php/fr/epargne-salariale/lepargne-au-sein-de-lentreprise

· La retraite en clair: information and news website on retirement, http://www.la-retraite-en-clair.fr/

· « The pay-as-you-go system is deteriorating, » Amundi 2016

· « The pension system in France: an overview, » Humanis

· « The different pension schemes, » Ministry of Social Affairs and Health