Defined-benefit supplementary pensions schemes under threat from Brussels

Defined-benefit pension plans, also known as “supplemental pension plans,” are under fire. Already shaken by recent measures taken by French authorities seeking to curb certain practices perceived as excessive, they now face a threat from the European Parliament. Will they survive these blows?

Defined-benefit plans accused of hindering worker mobility

In one year, before May 21, 2018, a European Union directive dated April 16, 2014, aimed at improving worker mobility among member states, will be transposed into French law. Among other measures, this directive stipulates that rights accrued under a supplemental pension plan must become definitively vested in the employee after three years of participation. Although the text theoretically applies only to employees who move to work in another European Union member state, it seems inconceivable that this logic would not also apply to employees who remain within France.

This new rule therefore directly affects defined-benefit pension plans of the L.137-11css type (better known as the “Article 39 ” plan or “supplementary pension” plan). Currently, under this so-called “contingent entitlement” plan, an employee who leaves the company loses all of their benefits. In Brussels’ view, this feature tends to tie employees a little too tightly to their jobs and to their country.

Should we save defined-benefit pension plans?

Defined-benefit pension plans had already undergone a series of regulatory and tax changes. Subject to nearly confiscatory taxation when pension benefits exceed a certain threshold*, their use has been restricted for corporate officers since the Macron Law, with the accrual of benefits now capped at 3% of their salary per year of service. The legal framework surrounding defined-benefit plans has thus become more restrictive due to their poor reputation, stemming from the size of the supplementary pensions granted to certain executives of very large companies.

However, Article 39 contracts are not limited to the CEOs of Carrefour or Thales. In fact, there are 200,000 retirees receiving an average annual pension of €5,500**; and companies pay less than €10,000 in contributions per year per employee. This average, however, masks significant disparities between small and large companies. This figure reveals one of the purposes of this program: to rapidly supplement the retirement income of employees or executives whose erratic career paths do not guarantee sufficient pensions.

Decide between several options before 2018

The straightforward transposition of the European directive is expected to result in the closure of defined-benefit plans under Article L137-11. Will they be extended or even replaced by a new plan that complies with the new regulations? The answer is not expected to be known until the 2018 Social Security Financing Act is passed. However, this mandatory regulatory change could also provide an opportunity to rethink the system. A few ideas have been put forward: simplifying and harmonizing its tax and social security framework, setting caps on its use to prevent certain excesses, and addressing the issue of beneficiary categories. This could revitalize a supplementary retirement solution that is both innovative and useful in a context of gradually declining pension benefits from the core systems.

The L137-11-css defined-benefit plan (also known as Article 39 and the “retraite chapeau”) is a supplemental pension plan that guarantees the beneficiary a certain level of lifetime annuity.

• Tax and Social Security Framework for Businesses:

The company's contributions to fund pensions are deductible from its taxable income.

Premiums paid to the insurer, which will then be responsible for paying the pension, are subject to a 24% social security contribution. When the company decides to pay the pensions itself, the contribution rate is 32%. It is deducted at the time the pension is paid.

Regardless of the option chosen—lump-sum payment or annuity—the employer is required to pay an additional contribution of 30% on annuities that exceed eight times the social security ceiling (i.e., 313 K€ for 2017)

• Tax and Social Security Framework for the Beneficiary:

Annuities are subject to the same tax and social security rules as retirement pensions. In addition, a tax of 7 to 14 percent applies, depending on the amount received.

* The defined-benefit pension plan

** Source: DREES