PARIS - The French Senate will vote this week on a long-awaited measure to encourage creation of private, advance-funded pension plans.
But the legislation may just nudge open the door for French pension plans: tax deductions for contributions are limited. And despite the clear intent of the government to provide domestic institutional support for the Paris Bourse, it's far from clear how much money will be invested in equities.
Still, the bill would mark a milestone in the development of advance-funded pension plans in France, which has remained wedded to its pay-as-you-go system. Some 15 billion francs to 30 billion francs ($2.87 billion to $5.73 billion) a year might be channeled into new defined contribution plans.
"The bill fills a gap in our system. We already had complementary payments under AGIRC and ARRCO but nothing like pension funds. This looks a lot like a U.S. 401(k) plan," said Arnauld d'Yvoire, general secretary of l'Observatoire des Retraites, a Paris-based research group on retirement benefits.
Added Richard Deville, a manager at Watson Wyatt Worldwide, Paris: "It is a very modest attempt to provide salaried employees faced with the prospect of shrinking pension benefits under a pay-as-you-go system to supplement" their retirement benefits.
The bill already has won approval from the Assemblee Nationale. While many hesitate at predicting passage given France's poor track record on enacting pension legislation, some experts believe legislation will be adopted because of the prominence given the issue by top government officials. The Senate will debate the bill Dec. 12, with adoption possible by year end.
"I think we've never been so near," said Brigitte Brugirard, directeur general of Societe de Prospective, Actuariat et Conseil, a benefits consulting firm in Paris.
French company officials have realized they no longer can depend on retirement benefits from the second-tier benefits provided by AGIRC and ARRCO, the twin systems that cover 14 million managerial and other workers, respectively. Last April, the systems announced increases in contributions and cuts in future benefit accruals that eventually will result in benefit cutbacks of 20% to 25% in the two systems.
The legislation would allow creation of a third tier of benefits: defined contribution plans that could be created by companies or through industrywide schemes. (Civil servants and self-employed workers already can take advantage of private pension plans.)
Unlike AGIRC and ARRCO, however, participation by employees in these new plans would be voluntary. The bill "means that every company can set up its pension fund and it will be up to the employee to participate or not to participate," said Frederic Jolly, managing director of Frank Russell Co., Paris.
Tax deductibility of contributions is limited, curtailing the appeal of the schemes. Combined employer and employee deductions would be limited to the lower of 5% of an individual's gross income or 20% of the social security wage base, now set at 32,496 francs.
Employer contributions would avoid social charges, now at an average 40% of pay, while employees could deduct up to 2% of gross annual income.
An earlier proposal would have permitted deductible limits of 10% of gross income, but experts did not hold great hope of the Senate restoring the 10% ceiling, given French budget pressures. Still, employers would be permitted to make contributions above the tax-deductible level.
Experts do not expect a flood of money going into the new plans. One major drawback is that about half of France's 28 million adults are exempt from income tax, leaving them with less of an incentive to tie up money in retirement vehicles, Mr. Jolly noted.
French retirement-plan experts agreed that initially only large and midsized companies with a significant number of managerial employees will take advantage of the legislation.
"In order to participate, a company must make a contribution which implies that it be somewhat profitable. Large corporations should thus go for it, also because they are already used to collecting employees' savings through employee savings plans," said Marie-Annick Peninon, general secretary of Association Francaise des Investisseurs en Capitaux, a Paris-based association for French venture capital investors.
Echoed Patrick Louah, analyst with manager Compagnie Parisienne de Reescompte, Paris: "It will work within prosperous companies capable and willing to offer extra benefits to their employees."
Officials at Caisse Nationale de Prevoyance, the insurance unit of Caisse de Depot et Consignations, the huge Paris-based financial institution that manages postal savings and other assets, reckon between 15 billion and 30 billion francs could flow annually into private pension funds - small potatoes compared with the 442 billion francs in premiums pulled in by life insurers in 1995, the most recent data available. Frank Russell's Mr. Jolly estimates inflows of 10 billion francs to 20 billion francs in 1997, building up to about 40 billion francs in three years.
Banks, insurers, mutual fund companies, instituts de prevoyance (special savings institutions) and Caisse des Depots would be eligible to manage assets.
More than 100 financial institutions are jockeying for position. While banks and insurance companies have lobbied for years to foster private plans in France, some think those best placed to gain are the instituts de prevoyance, such as Groupe Mederic, Groupe Malakoff and Groupe Mornay.
"These companies have a foot in the corporate door. They already manage company savings plans as opposed to assurance groups and banks whose presence is more remote," Mr. d'Yvoire said.
But insurers also will have an advantage: Retirees in the new plans will be required to take most of their benefits in annuity form, as a result of strenuous lobbying by French insurers. Lump sums will be limited to 20% of the retiree's account and capped at 100,000 francs.
For non-French money managers, it will be tough to win business, at least in the early years. "Companies will favor French managers because they know them best and also because little money is likely to be invested in foreign equity in which foreign managers have more expertise. I don't foresee more than 3 billion French francs being invested in foreign shares at first," Mr. Deville said.
Nor will the new plans give much of an immediate boost to the French stock market. A portion of 30 billion francs a year will not weigh much against total market capitalization of some 3 trillion francs.
What's more, some experts believe most of the assets will be invested in fixed income. While the bill would cap bond investments at 65% of total assets, many money managers probably will target that level. That leaves 35% for equity investments, of which 10 percentage points can be reserved for unquoted companies.
"The trouble with this proposal is that managers will be subjected to insurance industry prudential rules," Mr. Deville said.
Some experts think the expected dominance of insurers and instituts de prevoyance also will discourage equity investments. "Asset managers working for insurance companies are more comfortable with bonds than with the stock market. Some will have to learn from scratch," said Mr. d'Yvoire.
Still, if younger employees opt for the plans, money managers might lean more toward equity investments. "If young employees go for it, fund managers will edge more toward stock investments," said Yanick Philippon, in charge of pension fund developments at Caisse Nationale de Prevoyance, Paris.
In addition, Mr. Jolly said the law gives employers great discretion in designing plans, including investment choices to employees.
However, many pension-law requirements won't be known until the government issues more detailed regulations, probably sometime next year.
Joel Chernoff contributed to this article.
