New Private Pension Law in France
On 20 February 1997, the French government
passed the long-awaited bill concerning private pensions, which
will establish a voluntary 'third tier' pension provision for
employees in the private sector. The law, however, will not take
effect until regulations are published, which are expected this
summer.
Retirement Savings
Under the new law, employers will be able to set up a
Retirement Savings Plan (Plan d'Epargne Retraite - PER) which is
voluntary and open to all employees. The new schemes will be
defined contribution, with employees having their own account.
When participants reach retirement (the earliest being age 60),
the funds accumulated will be converted into a life pension.
There will be an option of taking 20% of the accumulated funds or
75% of the social security ceiling, whichever is lower, as a lump
sum.
Employers will be able to vary the conditions for
participation by category, but the conditions must be identical
for all employees in each category. If after one year, an
employer has not established a PER, an employee will have the
right to participate in any existing plan willing to accept him
or her. The amounts employees can contribute are unlimited, but
employer contributions will be capped at four times the
contribution of the employee. As contributions are voluntary,
they may be suspended at any time. When an employee leaves
service, there is the option of remaining in the plan or of
transferring the funds, without penalty, to another PER or group
life insurance contract.
Management and administration
The PERs are to be managed outside the company by a Retirement
Savings Fund (FER), whose sole business is financing the funds.
Subject to administrative approval, the FER may be created as an
insurance company, a mutual insurance company, an 'institution de
prévoyance', or a mutual. Although not required by law, asset
management may be delegated to a specialised professional.
Once a PER is put into place, a document must be issued to all
participants stating the conditions and frequency with which a
choice of an FER can be re-evaluated. In addition, a supervisory
committee must be created to define the management objectives of
the PER. Half of its members are to be selected by participants
of the plan, with non-participants allowed only if they
specialise in retirement issues or financial management.
Taxation of contributions and benefits
Employee and employer contributions are tax deductible up to a
total limit equal to the greater of 5% of salary or 20% of the
social security ceiling. Employer contributions are exempt from
social security charges in the same limits as existing defined
contributions plans. As a rule of thumb, employees earning up to
about FF 800,000 would be expected to pay social
charges on contributions. Benefits are subject to the same tax
treatment as other retirement pensions, which means they qualify
for a 10% deduction on pensions and a 20% general income
deduction. For lump sum payments, there is a special rule that
allows the tax on the lump sum to be calculated at four times the
marginal tax rate on one quarter of the amount.
How will this affect multinationals?
There has been some criticism that there is an inherent
inequality within the new law in that only those who can afford
to join will do so. Lower paid employees will have little
opportunity to save. Moreover, as employees must make investment
decisions, poor investment choices can provide inadequate savings
for the future. Employees will need to be better informed on how
to make proper investment choices. Also, PERs are not
particularly useful as an executive remuneration tool since the
tax deductible limits are low and plans must be open to all
employees. Moreover, the basic methodology and techniques for
retirement benefit planning remain unchanged. Nonetheless, there
is a willingness on the part of employees to contribute to such
schemes, regardless of employer contributions; and despite
criticism, the plan still presents a good opportunity for
companies to provide additional retirement income for their
employees on a voluntary basis.
Watson Wyatt has been following these developments closely and
is well-placed to assist companies in designing plans that are
most appropriate with reference to existing arrangements and
overall compensation and benefits objectives. Watson Wyatt can
also help companies select the most suitable providers from the
many that are expected to be established over the next year.
Perhaps the greatest challenge will be that of employee
communications and financial education and advice in particular.
Modern technology is expected to play a major role in ensuring
that employees are advised appropriately and that any employer's
obligation is discharged satisfactorily.
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