[FRANCE] Individual pension, a challenge for the future.

April 08, 2020

This article covers a regulatory change specific to France

Article by Alexandre Janot, Sales Manager.

According to projections made by INSEE, the French national statistic entity, close to a third of the entire French population will be over 60 years horizon 2060. Due to an ageing population, the ratio of the number of working people to the number of inactive people over the age of 60 should decrease from 1.9 in 2015 to 1.4 in 2070.

Taking a little perspective, it becomes clear that the difference between current income and pension income (generally measured by the replacement rate) will become more and more important. Thus, according to a 2014 study by the retirement orientation committee (COR), the replacement rate could be between 36% and 46% by 2060 compared to 52% currently.

Therefore and whatever changes we might see in the pension system in the years ahead, people in a working age have a growing interest to individually prepare the transition to their inactive age to preserve a standard of living desired.

The beginnings of these developments have emerged recently with the adoption April 11, 2019 by the Parliament, something known as “Loi PACTE”. This new law, and ensuing decrees detailing the details of implementation, are eagerly awaited by market participants. It will bring a fair share of changes to retirement savings in France including:

i) The abolition of the so called “forfait social”, concerning profit-sharing, for companies with less than 250 employees and, for profit-sharing and participation with those with less than 50 employees.                  

ii) The creation of what is known as PER (Plan d’épargne retraite, i.e. pension saving accounts with two main families: the individual PER (which will replace the current Madelin and Perp contracts) and the collective PER. The collective PER will exist in two versions: a first replacing the Perco employee savings plan, and a second replacing the PERE (current article 83).                

iii) Simplification and possible transfer of the main products between them (article 83, PERP, “Madelin”, Perco), including for the tax treatment of payments.              

iv) The evolution of exit methods for retirement products will give savers, once retired, the choice of a life annuity, capital or a mix of both according to the products.               

v) An incentive scheme for the transfer of life insurance to the benefit of the Retirement Savings Plan which will be in effect until January 1, 2023 (doubling of the amount of tax savings for amount up to 4,600 euros for a single person and up to 9,200 euros for a couple) .                 

These regulatory changes will give investors the opportunity to fully benefit from the advantages of complementary products for retirement, whether individual or collective.

Driving savings for building one’s pension must therefore become a major concern for everyone in a context of declining purchasing power.

However, savers often find themselves confused when placing their holdings and profit-sharing. In addition, they are intimidated by financial jargon and find it difficult to differentiate between possible investment options. They therefore abandon individual complementary products to the detriment of potential income.

Thus, in order for the changes brought about by the Loi Pacte to benefit savers, it is up to market players such as banks and insurance companies to provide their customers with simple and educational tools (for example using gamifications tactics) which will make it easier for them to understand and optimize savings. And it is up to Fintechs to help them in this endeavour by developing these platforms.