The Pension Crisis in France Causes and Remedies Pension Reform in the European Union: Comparing the Different National Approaches Cicero Foundation Seminar 16 May 2008 Ephraïm MARQUER Director Employee Savings and Retirement Schemes Private Equity and Venture Capital

2 Summary 1.Retirement system : Legal contextPage Corporate PensionsPage Individual plansPage Companies and employees expectationsPage

3 Context : the 3 pillars of the retirement scheme 3

4 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 4

5 Context : in 28 years, a decrease of 7 years in the length of working life 5 Source : FFSA

6 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) 6

7 Context : main issues facing France reduce the portion contributed by the 1 st pillar, while encouraging the development of the 2 nd and 3 rd pillars What tempo ? Future allocation ? To what extent ? 7

8 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 employees retirement Creation of the PERCO = a DC Corporate Pension scheme To implement favourable fiscal regime for employees/individuals and companies 8

9 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 9

10 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 companys agreement) Life annuity, subject to tax, level of taxation depending on the beneficiarys 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 10

11 Corporate Pension : PERCO (3/6) Companys 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 11

12 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 12

13 Corporate Pension : PERCO (5/6) + 84 % in

14 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 firms More than employees have already joined, investing on average euros Life cycle funds are the prefered choice of half of the employees 14

15 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 employees salary : Company contributions are compulsory Employee contributions = can be compulsory if so defined by the PEREs 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 15

16 The PERCO and other occupational schemes 16

17 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 17

18 Scope of saving/retirement plans for individual 18 Question : re-balance the weighting of each product ? Acquisition of Residential RealEstate 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 < 18O billion

19 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) 19

20 Employee expectations To be given definitive and « transferable » rights (especially for younger employees) To continue to benefit from companys contributions, irrespective of the companys 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) 20

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