PARIS - After years of false starts, the French Parliament is on the verge of passing a law encouraging adoption of private pension plans.
But the legislation is limited and there are substantial questions as to how many companies will establish plans, how many employees will participate and how assets will be invested.
The legislation would permit establishment of defined contribution plans, either by companies or in industrywide schemes. Final approval is expected by the Senate Feb. 19 and by the Assemblee Nationale Feb. 25.
A key issue is whether unions will agree to creation of such schemes, which threaten organized labor's status in running existing pay-as-you-go complementary plans.
Even without union cooperation, companies will be permitted to create plans unilaterally after a year. If no plan is established by an employer, employees will be free to participate in pooled schemes offered by financial institutions.
One shadow overhanging the market, however, is a threat by the Socialist Party to challenge the legislation's constitutionality, and possibly to seek repeal of pension reform if the party wins the March 1998 general election. A spokeswoman said private pension plans will benefit high-earners only and ultimately would undermine the state pension system.
"It can be a reason to wait (to start a pension plan), until the '98 elections," said Brigitte Brugirard, directeur general of Societe de Prospective, Actuariet et Conseil, an actuarial consulting firm in Paris.
Some unions, however, are expected to agree to set up plans, and avoid ceding the opportunity to employers. What's more, previously announced cutbacks in the twin secondary pension systems of AGIRC and ARRCO are moving French industry and unions in that direction. In particular, pharmaceutical and transportation industry unions are expected to back new funded plans.
Still, contributions are expected to be limited. Combined employer and employee contributions will be tax-deductible to the employee. Deductions are limited to the greater of 20%of the Social Security ceiling, or 32,928 francs, or 5%of gross salary for those earning above 662,000 francs ($118,000).
Employer contributions can be up to four times the level of employee contributions and still win favorable tax treatment. After-tax contributions also can be made.
Employers won a major victory, though, when the Parliament decided to exempt employer contributions from social charges, covering retirement and other welfare benefits, which can average 40%of a worker's pay. Unions had fought against the exemption because they feared its effect on the dwindling finances of AGIRC and ARRCO, which operate on a pay-as-you-go basis.
Still, with France grappling with 12%unemployment and a struggling economy, contributions are expected to be modest initially.
Michel Piermay, president of Fixage, a Paris-based consultant, believes large employers will shun the plans because they already provide adequate savings plans, while smaller companies cannot afford to create new benefits. "So medium-sized companies are probably the core of the market," he said.
A December survey by insurance giant AXA, now part of AXA-UAP Group, and Frank Russell Co. of 40 of the largest corporations in France revealed 69%believe they will create pension plans in the next three years. Equally telling is that 62%of the companies don't know how they will finance the plans, given already high employee benefit costs.
Companies will offer a choice between contributing to a pension fund or an increase in the base salary, predicted Frederic Jolly, managing director of Russell's Paris office. A pension contribution will not be simply an additional cost, but will add flexibility to compensation arrangements, he explained.
"On the employers' side, probably many companies will establish this type of savings plan, but they will contribute very (little)," said Arnauld d'Yvoire, general secretary for l'Observatoire des Retraites, a Paris-based research group on retirement issues.
Voluntary for employees
What may turn out to be a bigger issue is whether employees will embrace the plans, because participation will be voluntary.
Experts doubt whether French workers will be willing to lock up a chunk of their savings until retirement - and then to be paid out most of the benefit in an annuity. Only 20% of the capital value, up to 100,000 francs ($17,891), can be paid out in a lump sum under the legislation.
"One of the question marks is whether individuals will be very motivated to invest money in these schemes due to the fact there is this annuity system," said Jacques Cacheux, in charge of institutional marketing for Banque Nationale de Paris. Middle-class workers "would prefer to have the choice between annuity and capital," he added.
Echoed Mr. d'Yvoire: "It will be a big obstacle."
Nor will it be apparent immediately how successful the plans will be. At least a dozen major regulations providing more detail are needed from the government. At best, these regulations will be issued within the next six months. That means the first plans won't start until October or November in the best scenario.
French experts estimate only 10 billion to 15 billion French francs ($1.8 billion to $2.7 billion) will be put aside this year. That figure may build to 30 billion to 50 billion francs in annual retirement savings in about three to five years, they said.
That's a drop in the bucket compared with the 442 billion francs that went into life-insurance premiums in 1995, the latest data available.
Investment barriers remain
Even if employers, unions and workers are won to the new plans, it's far from clear how the assets will be invested - especially because they will be regulated by French insurance industry rules.
The law limits investment in fixed-income instruments to 65% of assets, in an effort to push plans toward equities and provide an underpinning for French stocks.
But insurance industry accounting treatment of equities will make the asset class appear much riskier. While bonds will be held at book value until they are sold, pension funds will have to make provision for unrealized gains and losses.
That means that if a stock bought at 100 francs falls to 90, as much as 10 francs will have to be reserved on the books.
This will do little to help overcome the inherent conservatism of French workers, who prefer guarantees on principal.
"At least you get back the money you put in," Ms. Brugirard explained.
While additional clarification may be forthcoming in the regulations, the accounting treatment hovers as a major impediment to equity investment. Added Jean-Pierre Begon-Lours, chairman of AXIVA, the retirement plan unit of AXA-UAP: "The main problem is the accounting system."
Overseas restrictions
In addition, the international investments of the new pension funds will be limited. Under insurance industry rules, 80% of liabilities will have to be invested in assets of domestic or easily convertible currencies.
French experts interpret this rule to mean that investments in any euro-denominated instrument will be acceptable - even though the euro will not be officially established until Jan. 1, 1999.
It's much more muddied how securities denominated in currencies of European Union countries not participating in economic and monetary union - notably, Great Britain - will be treated.
"Until 1999, by the time of the euro, we don't know how this regulation will apply and whether it will limit the ability to diversify beyond the Paris Stock Exchange," said BNP's Mr. Cacheux.
So far, this is not a big concern, as the infant plans are not expected to invest abroad to any great extent. But it could evolve into a major issue over time.
BNP and other French financial institutions are gearing up for the new plans. Under the legislation, special entities must be created to manage assets. What's more, the law limits asset management to life insurers, caisses de prevoyance (non-profit savings institutions run by industry and labor) and mutual funds. However, French banks are easily skirting the situation by establishing life insurance arms.
Russell's Mr. Jolly believes caisses des prevoyance will have a built-in advantage, because they already manage employer-sponsored profit-sharing accounts and thus have good ties with corporate human resource personnel.
