Home > Library > Stable Times > Volume 6, Issue 3  

Opportunities for Stable Value in France

The French have always viewed defined contribution (DC) pension plans with a certain degree of suspicion. In a country where solidarity (in the shape of income redistribution and a generous social safety net) often trumps individual interests, government-sponsored defined benefit plans are still the norm. DC plans, meanwhile, are accused of being too capitalistic and too "Anglo-Saxon." Since they threaten the status quo, they have remained mostly unwelcome.

Or have they really? Recent reforms in 2001 (under a socialist government, no less) have opened the floodgates for long-term employee savings plans. With their tax benefits, restrictions on liquidity and wide range of investment options, the Plan d'Epargne D'Entreprise ("Company Savings Plan") and its derivatives are pension plans in all but their name. Given the conservativeness of French investors and the rapid growth that is projected in this market segment, the opportunities for Stable Value products in France are very attractive indeed.

Market Demand

Demographics
The market for Stable Value in France benefits from a set of three mutually supporting circumstances. First, there is a clear market demand for safer investment options. The French population is ageing just as fast as its counterparts in the rest of the developed world. Over the next 40 years, 10 million more individuals will swell the ranks of senior citizens above 60 years old, by which time a full third (i.e. 22 million) of the French population will be above today's legal retirement age. The country's ever-improving life expectancy and its ageing cohorts of baby-boomers ensure that the number of retirees in France will continue to expand as never before.

Precisely because of these demographic events, investor preferences will likely shift down the risk/return spectrum towards safer financial products, as retirees and soon-to-be- retirees seek to secure a nest egg for their retirement. Principal protected investments such as Stable Value are ideally suited to this evolving market demand for safe, yet productive, savings products.

Investor Preferences
Furthermore, the traditional conservativeness of French investors bodes well for the prospects of Stable Value. French households do not have the same appetite for risk as their American counterparts: they hold 28.6% of their financial assets in cash, deposits and money market mutual funds, nearly twice as much as U.S. households (15.5%). Since it competes directly with such guaranteed investments, Stable Value should find an unusually receptive audience in the French market.

Market Structure

Recent changes in market structures are an equally valid cause for optimism as to Stable Value's potential in France. The French employee savings environment was entirely revamped in February 2001, with a radically expanded scope, investment duration and choice that make it much more attractive. The "Fabius law" (named after the Finance Minister at the time) authorized the portability of employee savings from one plan to the other and introduced a long-term (10-year) savings option to complement the traditional 5-year savings plans. Most importantly, the reforms finally endorsed collective savings plans for small and medium businesses that could ill afford to negotiate individual contracts with fund providers. The market for employee savings in France, and hence for Stable Value, has thus tripled to more than 15 million potential investors.

a) The Plan d'Epargne d'Entreprise (PEE and PEI)
Five million employees currently participate in this "Company Savings Plan," having invested a total of 53 billion euros in Company Common Placement Funds (Fonds Communs de Placements d'Entreprise, or FCPE). This is a booming market, as FCPE assets have more than doubled from their 1996 level of 22 billion euros.

Contributions to PEEs by employees and employers are on a voluntary basis only, although the tax benefits are very attractive for both parties. In practice, firms often channel incentives and bonuses towards their employee's savings plan, and may also match part of their employee's contributions. Withdrawals are restricted for a relatively short period of only 5 years, in addition to which they can be withdrawn in certain circumstances such as marriage, divorce, death, retirement, purchase of a home and so on.

PEEs have become even more attractive since the 2001 reforms, however, with the creation of "Inter-company Savings Plans" (Plan d'Epargne Inter-Entreprise, or PEI), specially designed for small and medium businesses. FCPEs are now open to employees working in separate firms, which creates substantial synergies for fund managers and also greatly simplifies the lives of employees and employers alike. As fund management fees drop and investment options expand, the popularity of PEEs and PEIs will only increase.

b) The Plan Partenarial d'Epargne Salariale Volontaire (PPESV and PPESVI)
In France, the PPESV comes closest to resembling traditional retirement plans elsewhere in the world. A product of the 2001 reforms, it is conceived as a long-term complement to the PEE for employees who wish to increase the amount of their employer's contributions. While the ceiling for employer contributions is 2300 euros annually for a PEE, it is 4600 euros for a PPESV. Employees can thus triple their employer's handouts by combining the two plans.

Although the PPESV is broadly similar to the PEE, it is designed for long-term, retirement-orientated investors. Withdrawals are restricted for 10 years, and liquidity is reduced by authorizing withdrawals only in the standard cases of death, disability or retirement. As for the PEE, there is also a specially designed alternative for small and medium businesses, in the shape of the PPESVI (Plan Partenarial d'Epargne Salariale Volontaire Inter-Entreprise). This cousin of the PEI offers the same broad advantages for investors, firms, and managers alike.

Overall, the PPESV is set for a spectacular takeoff. When they reach their peak in the next decade, PPESVs may manage as much as 200 billion euros in assets.

Diversification of Assets

The need for greater investment diversification is the third and last of the three mutually supporting circumstances that could benefit Stable Value in France. The Commission des Operations de Bourse (the French equivalent of the SEC) has complained of the lack of diversification of assets within FCPEs, since 50% of employee savings are invested in their employer's own securities. Not only does this pose substantial long-term risks to employees' financial well-being, but this asset concentration also runs against the employees' own investment preferences.

Until recently, in fact, half of all French companies with PEEs only offered one or two funds to their workers. The 2001 reforms creating PEIs and PPESVIs were partly intended to solve this lack of diversity, and PEE administrators have also increasingly begun to offer multi-manager funds. Thus, not only does this burgeoning catalogue of fund choices suit employee demands, but it may also help new products such as Stable Value to leap into the employee savings market.

Accounting Foundations

The main barrier facing the adoption of Stable Value funds in France, as anywhere else, is the need to account for assets at book value instead of market value, in order to provide the guarantee on principle and accrued interest that is the defining characteristic of Stable Value products. The consequent dissociation between the performance of underlying assets and investor returns must therefore conform to accounting standards, as is the case with AICPA SOP 94-4 in the United States.

Our research indicates that such accounting treatment could be applied in France to the wrap that provides the guarantee for a Stable Value fund and still comply with the accounting requirements set in the COB's regulation n°89-02 regarding mutual funds. Furthermore, in 2001 the COB extended some of the very same accounting privileges needed for Stable Value funds to mutual funds that operate in the employee savings environment and use leverage as a tool to boost performance (OPCVM dits "á effet de levier"). The accounting barriers to Stable Value in France, we believe, can be overcome.

Conclusion

The prospects for Stable Value in France are driven by three mutually supportive factors that are all cause for optimism. Market demand, in the shape of evolving demographics and investor preferences, is increasingly directed towards safe investments, while market structures themselves are also evolving in the right direction, thanks to recent reforms. Finally, authorities and employees both recognize the need for more asset diversification. Benefiting from the appropriate accounting treatment, Stable Value could not only find its niche in the French market for retirement savings, but it also certainly would be well positioned to take advantage of such an expanding market.

Read Next: An ERISA Investment Check-Up: Procedural Prudence in Today's Market