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24/01/2020

Retirement savings plans: 10 questions that companies are asking themselves

The pension reform presented by the government and the roll-out of the new PER (retirement savings plan) on 1 October have brought supplementary retirement savings back to the fore. However, the complex nature of the mechanisms and changes foreseen by the PACTE Act has led to questions in companies, among management and employees alike.

 

Questions on the side of employers…

 

1. Am I required to introduce supplementary retirement savings plans?

 

Unlike supplementary health cover and retirement savings (for managerial staff and in some occupational fields for all staff), companies are not required to offer their employees group retirement savings plans. “There is no legal or regulatory obligation requiring companies to introduce supplementary retirement savings mechanisms,” confirmed Pascale Baron, an associate with the law firm Rigaud Avocats, which specialises in pay and benefit law. Nevertheless, a handful of collective agreements, primarily in the insurance sector, stipulate such an obligation. Thus, when in doubt, “the head of a company must have the reflex to check the collective agreement to determine whether he is required under a branch agreement to introduce a supplementary retirement savings plan,” advised Pascale Baron.

 

Furthermore, independently of the PACTE Act presenting a new version of the PER (retirement savings plan), companies which have been operating a PEE (company retirement savings plan) for more than three years are required to open negotiations with staff representatives with a view to introducing a PERCO (group retirement savings plan) or a defined contribution supplementary retirement savings scheme, more commonly called “Article 83” (the relevant article in the General Tax Code). However, nothing says that the negotiations must lead to the implementation of one of these two options. “The government could have taken advantage of the PACTE Act to introduce a requirement to offset the future impact of the reform of the mandatory basic and supplementary retirement savings schemes,” opined Julie Jacotot, an associate with Froment-Briens, a legal firm specialising in labour law.

 

However, Xavier Clément-Lacroix, Retirement Savings Director at insurance broker Verlingue, predicted that “companies are going to have to introduce group retirement savings pension plans if they want to remain attractive on the job market.” As the PER (retirement savings plan) created by the PACTE Act was fully and easily transferable from one company to another, it is going to become complicated to do without.  “In the long term, a solution must be found for new hires seeking to transfer their acquired rights from the PER of their previous employer,” warned Xavier Clément-Lacroix. To sum up, even though supplementary retirement savings plans are not compulsory, they will likely become increasingly unavoidable in practice.

 

 

2. What is the point of introducing a company retirement savings scheme?

 

Introducing a supplementary retirement savings scheme offers a clear financial benefit for a company. Article 83 employer contributions are exempt from social contributions for 5% of pay subject to social security contributions with a minimum 5% of the PASS (social security ceiling) amounting to €2,056.80 for 2020 and a maximum total of 5 PASS or €10,284 for 2020. These limits must be reduced in case of employers’ top-up contributions (amount paid by the employer as a complement to the voluntary payments made by the employee) paid onto the PERCO, whose exemption ceiling may not exceed 16% of the PASS (€6,581.76 for 2020). “These social contribution exemptions have been reproduced in the PER,” explained Julie Jacotot from Froment-Briens.

 

As Pascale Baron from Rigaud Avocats noted, “an Article 83 vehicle is less expensive for the employer than a bonus or a wage increase.” Nor should one forget that the employer is not required to pay the employer’s top-up contribution into the PERCO. In this case, all the employer is obliged to pay are the account maintenance fees, amounting to €150-300 per year and per employee. Finally, it should be noted that the “forfait social” (social flat-fee) may be lowered from 20% to 16% in PERCOs and PERs if at least 10% of the balance is invested in shares of small and medium-sized enterprises (SMEs) or intermediate-sized enterprises (ISEs).

 

 

3. Am I required to turn my Article 83 vehicle into a mandatory PER? What advantages does the PACTE Act offer?

 

The PER features a compartment for mandatory contributions. Even though companies are no longer required as from 1 October 2020 to introduce an Article 83 vehicle, they still have the option of keeping schemes introduced before this date and continuing to pay into them. In other words, employers are not obliged to turn their Article 83 into a PER, including after 1 October 2020. In some cases, this might even be detrimental for employees. “Some Article 83 vehicles offer yields or mortality tables that are more advantageous than the PER’s mandatory savings compartment,” confirmed Julie Jacotot.

 

Yet this does not mean that there is nothing to be gained by turning an Article 83 into a PER, on the contrary. With a PER, voluntary contributions may be unlocked early to buy a principal residence or converted at retirement into an annuity or lump sum, something that is not possible with an Article 83 vehicle.

 

 

4. Is it possible to turn an existing Article 83 into a new mandatory PER?

 

Turning a PERCO into a PER is not a problem. This is not the case with an Article 83, which is an insurance contract. “If the company wishes to do so, it must check its contract to determine whether the group transfer is possible and advisable (transfer clauses, options underwritten, etc.). Otherwise, the transfer of rights may take place on an individual basis, at the employee’s discretion,” explained Sophie Tarron, the actuary responsible for the technical management of Retirements Savings at Verlingue.

 

 

5. Are there solutions that meet the special needs of senior management within the framework of the universal system?

 

“Senior executives are going to be hit by a double whammy. Not only does replacement decline according to wage level, but the planned contribution base ceiling of 3 PASS for the future pension reform will penalise them severely,” warned Xavier Clément-Lacroix at Verlingue. If they want to motivate and retain their execs earning over €10,000 per month, companies are going to have to offer them a permanent solution to offset the drop in their replacement income.

 

“The real find with the PACTE Act is the waiver foreseen in the new Article 39,” stated Arnaud de Wazières, Director for Retirement Sales Development at insurer Groupama Gan Vie. “As companies had strongly hoped, the new Article 39 will no longer be a handicap. What is more, rights will be acquired every year. In addition, the notion of objective categories will be less binding,” he added.

 

Such mechanisms, which are often related to “top hat plans” and regularly make headlines owing to the very large sums paid to CEOs at retirement, were hitherto conditioned by the beneficiary’s presence in the company upon the withdrawal of his mandatory retirement savings. However, the European Union has ruled that this obligation is not in conformity with the right to occupational mobility.

 

Consequently, the PACTE Act introduced a revision to ensure compliance with European regulations. These systems, established under Article L137-11-2 of the Social Security Code, are a real innovation that complements the PER. They allow for the acquisition of pension rights up to 3% of the beneficiary’s annual pay within the limit of 30 points over his entire career, in an advantageous fiscal and social framework. We must await publication of the circular, scheduled for early 2020, for this provision to be confirmed and enter into force.

 

“The new Article 39 may be implemented if the company simultaneously offers all its employees a retirement savings scheme,” explained Xavier Clément-Lacroix from Verlingue.

 

 

… And questions on the side of employees

 

6. Can I make supplementary payments in addition to my employer’s payments? Can I qualify for tax breaks?

 

Employees have the option of topping up mandatory PEROB contributions via voluntary payments. They may also make payments onto their PERCOL with or without employers’ top-up contributions. Voluntary payments have now become standard for PERs via the creation of a dedicated compartment. They qualify for the same tax breaks as the optional individual payments present in some Article 83 vehicles, namely 10% of the PASS or, if the formula is more advantageous, 10% of professional income for the previous year up to a limit of 8 times the PASS for the previous year. This was not the case with group retirement savings plans. “Employees who have a PERCO should not necessarily pay into it because voluntary payments cannot be deducted from taxable income,” noted Pascale Baron from Rigaud Avocats. This will become the case with the PERCOL.

 

When subscribing to a PER or making a voluntary payment, the employee may also decide not to deduct the amounts paid from the income to be declared to the tax authorities. In this case, he qualifies for a lower tax burden at the time of exit, as an annuity and/or a lump sum. As far as retirement savings schemes are concerned, this is a unique mechanism that may prove relevant given that over half of the French do not pay income tax today.

 

 

7. Are the savings in these vehicles financially secure?

 

The PACTE Act introduces automated financial management grids. This type of mechanism makes sense in the current period of desperately low interest rates. “Automated management makes it possible to look for yields over time because the PER assets are primarily invested in shares at the beginning of capitalisation with secure savings, via funds in euros, when the retirement horizon draws near,” pointed out Sophie Tarron from Verlingue.

 

In addition to automated management, as from 1 January 2023 the PACTE Act also provides for incentives, namely fully-fledged management of PER funds in euros. “This implies that the funds in euros dedicated to group retirement savings plans are not integrated, in accounting terms, into the insurer’s other general assets. This procedure, already in force with the PERP (individual retirement savings plan) and some Article 83 contracts, secures the investment because the insurer may not, for example, use the profits to boost yields on his life insurance contracts,” explained Sophie Tarron. However, as noted by Arnaud de Wazières from Groupama Gan Vie, the fact remains that “the PER incentive obligation foreseen for 2023 could be postponed if low interest rates persist.”

 

 

8. What happens to my retirement savings in case of death? How can I pass it on to my family members?

 

What happens to the contract upon the policyholder’s death depends on whether or not the deceased had withdrawn his retirement savings as a lump sum during his lifetime. Prior to withdrawal of the pension savings, the accumulated capital is paid to the designated beneficiaries. The amounts paid are exempt from income tax and estate tax. After withdrawal of the retirement savings, the conditions depend on the pension benefit options which the member chose at retirement, which best suit his personal and family circumstances: in the absence of a guarantee, the pension paid during the member’s lifetime will be definitely lost.

 

Depending on the guarantee chosen, the designated beneficiaries may be entitled to pension benefits upon the insured member’s death. This is the case with the reversionary annuity (life benefit) or the guaranteed life annuity (paid during a contractually stipulated pre-set period).

 

 

9. If I change employers, what happens to my rights? Can I transfer my funds to a new system, and at what cost?

 

As with the mandatory basic retirement and supplementary retirement savings plans, rights to supplementary retirement savings are permanently locked in. If the employee leaves his company, the balance (in other words the payments plus interest and unrealised gains) is retained. However, his individual account is no longer fed by contributions from his former employer (employer’s top-up contributions in the case of PERCO or PERCOL and mandatory contributions in the case of PEROB or Article 83). Nevertheless, he can continue to make voluntary payments on his contracts and qualify for ad hoc tax breaks. If the new employer offers similar schemes, the employee has the option of transferring his account balances to these schemes.

 

With the PER, lawmakers sought to establish “portability” for all supplementary retirement savings rights. Employees can transfer all of their rights to their new employer.

 

“Some employees may be reluctant to make voluntary payments onto PERCO or Article 82 accounts when they do not know whether they are going to stay with the company. As PERs are fully transferable, this sticking-point is likely to disappear because they will know that they can build on their acquired rights even if they change employers,” said Pascale Baron from Rigaud Avocats.

 

A PER has three compartments for different kinds of inpayments:

– An individual compartment for voluntary payments

– An employee savings compartment fed, according to the PERCO model, by bonuses from incentives and profit-sharing, employer’s top-up contributions and paid untaken leave entitlements (paid leave, compensatory time off)

– A mandatory retirement savings compartment, modelled on Article 83 and fed by mandatory contributions.

 

The PACTE Act also facilitates transfers between different mechanisms (PERIN, PEROB, PERCOL) and fixes transfer fees at 1% of the balance and zero after five years.

 

“Thus, the PER makes it possible to assist retirement savers throughout their professional or personal life with the preparation of their retirement, via full portability of their retirement savings,” emphasised Sophie Tarron.

 

 

10. How can I know if I have a supplementary retirement savings contract? How can I use these savings?

 

“For years, we saw anything and everything in terms of retirement savings. Players sold these mechanisms without any framework or services and at a high cost. Those days are over,” assured Xavier Clément-Lacroix. This was also the fault of the employees who, for a long time, paid little attention to this issue. Here as well, things seem to be changing.

 

This change is being facilitated through better access to information thanks to the new interfaces provided. “The process of digital assistance for operators has been greatly improved in recent years. The provision of online tools makes it possible to assist employers and reassure savers,” noted Sophie Tarron from Verlingue. Such tools not only remind employees that their company offers group retirement savings schemes but also helps them project and envisage the possible scenarios at the time of retirement. “Pension benefit simulators show expected yields and the transformation of retirement savings capital into annuities,” noted Sophie Tarron.

 

These tools also offer a means of managing retirement savings. With the PER, members have many different exit scenarios.

 

During their working life, members can recover their retirement savings in the form of a lump sum in certain circumstances while continuing to benefit from fiscal and social contribution exemptions in case of life accidents and for the acquisition of a principal residence (only for retirement savings funds from voluntary payments and employee savings plans).

 

At retirement:

– Voluntary retirement savings can be paid as a lump sum or annuity, at members’ discretion

– The rights from mandatory payments are paid in the form of annuities.

 

Employers must estimate their loss of income at retirement and determine their financial needs in the medium, long or even very long run in order to decide on their retirement savings exit mode.

 

“The PACTE Act obliges contract managers to start informing employees five years before retirement of their status and the exit conditions,” stressed Xavier Clément-Lacroix from Verlingue.

 

Jean-Philippe Dubosc – L’Opinion