Rendezvous for Savings

They devoted the second part of their report to retirement savings and, using the results of the BPCE L’Epargne barometer survey, reviewed the appetite of French households for the new pension savings plans resulting from the so-called “Pacte” law (Plan d’Action pour la Croissance et la Transformation des Entreprises, or “Action Plan for Business Growth and Transformation”) and offered a short- and medium-term outlook on the development of these new savings vehicles.

2019 review of household investments and outlook for 2020

In 2019, the flows of financial investments (excluding directly held securities and capitalized interest) made by the French reached record levels in excess of €90bn (€74.5bn including the negative impact of securities). To a great extent, these new investments were driven by the temporary boost given to household purchasing power (more than 2.1% per year thanks to the so-called “Macron” measures combined with the decline in inflation and the moderate acceleration in wages and employment) as well as by the production of new home loans that continued at extremely high levels (6.8% growth in outstandings). On this second point, the lower level of interest rates further boosted demand for home loans, with the additional debt increasing financial investments thanks to the growth in disposable household resources available for arbitrage. Similarly, the savings rate rose to 14.9% (14.2% in 2018), reflecting the usual lag of at least four quarters between income growth and the hoped-for rebound in consumption.

In terms of arbitrage, the low opportunity cost of holding non- or low-interest-bearing cash holdings further boosted sight deposits, which rose to an all-time high of nearly €40 billion. We also witnessed a revival in deposits on passbook savings accounts (Livret A, Sustainable Development & Social Solidarity, and other passbook savings accounts) to the extent that a proportion of households have started to become accustomed to the low interest-rate environment and to consider the remuneration of the Livret A passbook savings account in relative, as opposed to absolute, terms. Life insurance (€25.9bn) continued its recovery, but euro-denominated products, which had enjoyed sharp growth until the summer, have seen their slide confirmed since October as a large number of insurers decided to curb new deposits on this type of product owing to the difficulty of ensuring guaranteed returns against a background of abnormally low interest rates.

In 2020, the savings rate should remain close to 14.9% or fall only marginally. Nevertheless, net inflows of financial investments, excluding securities, are expected to decline to €76.5 billion (or around €58 billion if securities are included), owing to less dynamic purchasing power (1.4%) and, a priori, to a slower increase in the distribution of home loans than in 2019. Against a backdrop of historically low interest rates, savers are expected to continue to favor secure and readily available savings at the expense of solutions that promise higher returns but greater risk (such as equities) even if investors are now tending to calculate rates of return net of tax and net of inflation slightly better than before. The reduction to 0.5% of the interest paid on Livret A passbook savings accounts is expected, all other things being equal, to have a negative impact on Livret A, Sustainable Development & Social Solidarity, and other passbook savings accounts and give greater impetus to life insurance (thereby offsetting the downward trend triggered by the decline in euro-denominated products) and sight deposit accounts. These two vehicles are consequently expected to attract new funds of €25.5 billion and €37 billion respectively, i.e. 33% and 48% of net inflows (excluding securities).

The French and retirement savings

According to the four-monthly BPCE L’Observatoire/Audirep barometer survey (an opinion poll conducted in December 2019 among 2,054 individuals against a background of the government’s pension reform), 52% of French people of working age say they are planning to save more for their retirement. These intentions, which are relatively homogeneous within the population, are based on a twofold consensus shared by the French: on the one hand, three-quarters of working people consider that their future pensions will not be enough to ensure them a decent standard of living during retirement; on the other hand, beyond the need to balance their day-to-day budgets, the financial concerns of the French are largely determined by the challenges of longer life expectancy. Retirement is just one among several other factors of uncertainty they have to consider. These include dependency, helping their children, transferring their property, preserving their health, and providing protection for their spouse, etc.

Nevertheless, this strong desire to save for retirement does little to favor pension savings themselves. The principal assets favored by French households enable them to respond to a number of contingencies: the purchase of one’s main home, subscription for life insurance, rental property, and even employee savings. Retirement savings only come next in the list of priorities, a position corresponding to the low level of capital mobilized. In 2018, with deposits of €237 billion on all individual and collective retirement saving vehicles taken together, saving for retirement comes after life insurance as well as Livret A passbook savings accounts. It has long suffered from its ingrained weaknesses: a fragmented and complex offer, lack of visibility and flexibility, incompatibility with plans to buy one’s own home, the sheer number of uncertainties related to long life, insufficient average contributions, and limited availability in micro-companies and SMEs.

Can the new pension savings plans resulting from the “Pacte” law change all this? If these plans are to succeed, an initial obstacle must be overcome: the fact that only 16% of French people have heard about and have a general understanding of the new system. Despite this, however, 27% of working-age people plan to subscribe to an individual pension savings plan after learning about its principal characteristics, while 34% remain undecided. With regard to collective schemes, 37% of private sector employees are interested, with this proportion rising among companies offering this possibility.

In total, 32% of French people are interested in subscribing to an individual or group retirement savings product. If holders of an existing retirement savings product are excluded, the potential for new subscriptions concerns 24% of the active population, i.e. more than 7 million individuals whose younger and less affluent profile is likely to significantly broaden the current socio-demographic base for the distribution of retirement savings products.

It is clear that the Pacte law has removed some of the obstacles to the development of retirement savings with the possibility to withdraw invested capital and the fungibility of the investment vehicles, the involvement of public authorities, the development of competition, the exceptional tax advantage when joining the scheme, etc. A change in the scale of retirement savings is consequently expected to occur as early as 2020 with gross contributions in excess of €15bn. There continue to exist, however, a great many obstacles to rapid and sustained growth: the fact that people on the whole are unfamiliar with the scheme and its limited distribution among micro-companies and SMEs, the regulatory and fiscal complexity of this typically French approach to the problem combining 3 different types of savings vehicles and 3 to 4 “compartments,” a capital withdrawal option that remains penalized by taxation, etc. It is likely that the goal of reaching €300bn in assets under management in 2022 will not be achieved considering the time required to assimilate such a complex scheme.