Replacement rates, i.e. the ratio of pension entitlement to pre-retirement earnings, are continuing to fall. A 2015 study by the Drees, a French ministry statistical body, showed that the average replacement rate had fallen from 80% to 75% for the 1936 to 1946 generations. This trend is set to continue and increase over the coming years. Workers are beginning to take this onboard. They used to be oblivious but today they are worried…but not to the extent of taking corrective action. It is probably the right opportunity for employers to make better use of, or extend their staff pension schemes. Here is what we suggest can be done.
Provide information to the workforce
According to a 2017 OpinionWay survey, 68% of workers say they do not have enough information on pensions. Even though they are more and more worried about the fall in living standards on retirement, very few are able to properly evaluate the amount of pension income they could be entitled to under first and second tier schemes (social security + Agirc/Arrco).
Forecasts published by the Pensions Advisory Council (the COR) do throw some light on these issues. The Council has drawn up several scenarios based on different profiles. For example, the COR estimates that a non-managerial employee born in the 1960s and earning €2,300 gross on retirement would enjoy a replacement rate of 77%. A person with the same profile born in the 1980s would only have 70% on retirement.
The higher the earnings the lower the replacement rate. This means that a manager born in the 1980s earning a monthly gross salary of €6,800 (2.7 times the national average wage) would have to be content with a 51% rate of replacement when retiring in 2040 compared to 57% for the manager born in 1960.
Offer customised retirement simulations from age 40
Broad brush simulations will encourage employees, and in particular managers, to investigate more deeply their own particular situation. There are simulators available, particularly on the CNAV (social security) and Agirc/Arrco websites, as well as an online application, proposed by Gerep in partnership with Sapiendo. This application enables you to obtain a personalised retirement statement (or RIS) and undertake precise checks and controls.
These tools, albeit very useful ones, are no substitute for the advice and solutions obtainable from a personalised retirement pension audit. Many companies offer such services to their staff once they reach 50. However, just ten years off retirement, it is a bit late to put in hand effective corrective measures. For example, by putting 8% of his/her salary into an “Article 83” retirement plan, a 52 year old employee could only increase their replacement rate by 2.7 points. With the same effort, an employee born 20 years later, could increase his/her replacement rate by 6.6% on retirement. The added value brought by a personalised audit is therefore much greater for employees between 40 and 50. People in this age-group are much more aware of retirement issues than younger people and have much more room for manoeuvre than older staff.
Revise existing schemes and educate people
In 2016, nearly 13% of the working population, including self-employed, benefited from some sort of complementary pension scheme, i.e. twice as many as in 2015. Nevertheless, even though the Drees has established that 4.8 million people belonged to additional “Article 83” type schemes in 2015, they only found 2.1 million people actually making contributions, i.e. accounts in credit. What is more, the average contributions paid into such schemes each year does not even reach €700 per member.
The low level of contributions stems mostly from the fact that some schemes are old and need to be revised. Some of these additional “Article 83” type schemes have not been altered to take account of new regulations allowing for additional voluntary contributions. At the same time, some so-called Perco schemes set up as a result of mandatory annual negotiations have been carefully brushed under the carpet. Generally speaking, moves are made to educate people at the time such schemes are set up but such efforts gradually fall away.
The so-called Pacte Law will, no doubt, boost employee retirement savings. In the meantime, it is absolutely essential to begin by making better use of existing schemes. Workers worried about their retirement but supplemental pension schemes left in abandonment – something is not right!