With 200 billion Euros in assets under management, retirement savings schemes fail to attract public interest. On the other hand, life insurance contracts are a star attraction with a total of 1,700 billion. Will the “Pacte” law change things? Out of the 74 articles that make up this ambitious, heterogeneous legislation, only one single little article – article 20 – relates to retirement savings. And yet, softly softly, this article could well make such schemes more attractive. This impetus stems from the harmonisation of existing schemes and simplification of the rules.
A framework for retirement savings and three watertight compartments
At this point in time, there are several retirement savings arrangements, each with its own special features: defined contribution schemes (article 83), company group schemes (Perco), Madelin schemes for freelancers and personal schemes (Perp). At first sight, the “Pacte” law does not make these differences disappear. Instead, it sets up a single legal framework that encompasses them all, without replacing them. There will be no need for companies to embark on tiresome renegotiations of existing agreements. Quite simply, the rules, written into the Monetary and Financial Code, will change somewhat and apply to all existing contracts with the result that their main differences will disappear.
The trick is that each savings product will be split into three compartments depending on the origin of the retirement savings they contain. The first compartment will house voluntary contributions from the beneficiary, the second will house amounts paid in as employee savings and the third will house compulsory employer and employee contributions. In the future, specific rules governing taxation, social security contributions and the availability of savings assets will apply to each of these compartments.
Portability and transferability
This change of architecture will firstly result in the possibility to transfer one’s savings from one plan to another. It will be possible to transfer one’s savings from a Perco over to an Article 83…but with no change of compartment. This will make it much easier for employees to take their pension rights with them when leaving a job.
This result has been achieved by harmonising the tax and social security contribution rules across savings products. Harmonisation will lead to improvements in that each scheme will adopt the strong points of other plans. For instance, with the “Pacte” law, voluntary contributions into a Perco will become deductible for income tax purposes, while Article 83 plans offering guided asset management by default will benefit from a lower flat social security levy of 16%.
New opportunities for lump-sum withdrawals from Article 83 schemes
Defined contribution pension schemes – Article 83 – will benefit immensely from such harmonisation. For the moment, withdrawal in the form of a lifelong annuity is the rule. Only certain very unpleasant situations allow people to make a lump-sum withdrawal (disablement, unemployment without benefits, over-indebtedness and the death of a spouse). In the future, on retirement, employees will have the choice between withdrawal as a lump-sum or a lifelong annuity, as regards the savings they have built up in the voluntary contribution and employee savings compartments. Furthermore, these compartments will allow a further instance of early withdrawal: purchasing one’s principal residence.
Article 83 schemes now become much more attractive for employees
With these changes, Article 83 arrangements, particularly appreciated by employees as a tax break, now become even more attractive. Because it gives more freedom of choice to the saving public, it could well fit into a long-term savings strategy with fewer constraints. Younger employees, for instance, who do not yet own their principal residence, will have the impression of having more control over their voluntary contributions.
At the moment, only one in three employers believes staff are aware of the benefits of defined contribution plans and voluntary contributions. Even if the new system is not necessarily simpler, it does at least have the merit of being more coherent and understandable. We wouldn’t mind betting that employers will seize the opportunity to talk up such deferred remuneration, so often wrongly ignored by beneficiaries.Damien Vieillard-Baron.