PACTE LAW: PROSPECTS FOR RETIREMENT SAVINGS (1/2)

Retirement savings: essential, but marginal in France

The lengthening of the lifespan and the aging of the French population pose the thorny question of the financing of pensions. Indeed, in 1960, France had 4 contributors per retiree, against only 1.5 contributors per retiree in 2015. Also, in 2050, one in three French people will be over 60 years old: it is, therefore, crucial to find solutions to finance pensions.

Currently, 14% of French GDP is used for retirement expenses or 310 billion euros per year. Despite this, the replacement rate (ratio between the last income received as an asset and the number of retirement pensions paid) continues to decrease. Retirement savings are a device that supplements the benefits provided by compulsory retirement plans. It represents only 4% of the financial savings of the French (against 14% in the European Union) and this insufficiency penalizes both retirees and the overall economy.

The marginal place of retirement savings systems can be explained in several ways: life annuities perceived as too low, lack of information and transparency on retirement savings products, savers' mistrust in equity investments.

The PACTE law: boosting retirement savings

The PACTE law (Action Plan for Growth and Business Transformation) piloted by Bercy and voted by the National Assembly on October 9, 2018, aims to give businesses the means to innovate, transform, grow and create jobs. Its main objective is to reform retirement savings to develop them by making them more attractive and by offering savers better prospects of return (Articles 20 and 21 of the law).

These provisions resonate with the concerns of the French, 74% of whom believe that their retirement will be insufficient to live properly. This objective goes hand in hand with a government's desire to promote productive investment through equity financing of companies, in particular, SMEs and mid-cap companies. This article focuses only on articles 20 and 21 of the PACTE law.

France has 15 million retirees, 85% of whose income comes from compulsory retirement schemes (pay-as-you-go schemes) and 15% from capital income (real estate or furniture). In the context of declining replacement rates, building up assets for retirement is becoming a new motivation for the French. On the one hand, insurance companies consider that a third of life insurance is dedicated to retirement or an outstanding amount of 540 billion euros. On the other hand, retirement savings are based on company systems (PERCO and PERE), as well as on individual systems (PERP, Madelin, to name only the main ones). The addition of these two types of devices represents 200 billion euros in assets.

The government, therefore, wants to increase retirement savings outstandings by 50% by the end of the five-year term. To achieve this objective, Bercy works in co-construction with all the players around five key elements:

• The euro growth fund will be modernized and simplified, by introducing a single rate of return each year. It may also be supplemented by longer investment commitments. However, the capital guarantee at maturity will be maintained.
• A single set of rules will be defined for retirement savings products for the sake of simplicity. Entry and exit conditions for products will be aligned, taxation will be generalized to all products. Also, the conditions for early release (invalidity, real estate purchase, etc.) will be extended to all products.
• The choice is given to savers between a capital outflow or the payment of a life annuity. Savers will thus be able to opt for a capital outflow of outstandings made up of voluntary payments or employee savings. The sums resulting from compulsory payments will give rise to the payment of a life annuity.
• The portability of retirement savings products will be made possible. The government authorizes the portability of one product to another whatever its nature and the insurer: such a mechanism would allow savers to have only one retirement savings contract to manage whatever their evolution of a career.
• Insurance organizations will be required to establish auxiliary allocation accounts for the commitments concerned, that is to say, to confine retirement savings assets in their balance sheet, to protect the rights of savers about the 'allocation of the participants to the technical and financial benefits or in the event of default by the service provider.

These five elements converge towards the same goal: that creating a unique retirement savings product.

Towards a unique savings product

In France, retirement-related measures are divided into two categories: products subscribed to within the framework of the company (PERCO and PERE), and individual products (PERP, Madelin). In addition to these retirement savings products, there are life insurance policies, of which a third of the contracts taken out are dedicated to retirement. The products offered today meet a specific framework and each product has a source of funding with specific conditions:

Conclusion

The PACTE law offers a new product with a common base: the subscription framework, the sources of financing, and the exit conditions will be identical. This will lead to coexistence in free competition between insurance and banking savings solutions. The positioning of these two industries is therefore set to change. What transformations both in the market and their value chain will the historical players operate to capture customers in this market worth 300 billion euros?