5 questions to help you use your payroll savings

Employee Savings Plans (ESPs) are not affected by the current crisis. In 2020, total assets under management in ESPs, in France, reached a new record of €147 billion, with gross inflows of €16 billion. The number of beneficiaries now stands at over 11 million. Although the majority of employees are satisfied with existing schemes, many are nevertheless calling for greater clarity and more information, particularly on investment vehicles. Here are some answers to clear up the grey areas.

Save or withdraw, what to choose ?

Almost a third of people benefiting from incentives and profit-sharing prefer to cash in their bonus rather than put it into a savings plan. They can’t be wrong if it is to cover a bank overdraft or finance a purchase they’ve been dreaming about for months. However, if bonuses are taken in cash without transferring to savings, they become taxable, and are reduced by 11%, 30% or over 40% depending on the employee’s marginal tax rate. Choosing a savings plan is therefore, first and foremost, a good deal from a tax point of view.

Is caution always the best policy ?

Three quarters of employee savings beneficiaries say they prefer prudent or risk-free investments. In fact, money market funds, bond funds and diversified conservative funds account for more than half of all employee savings scheme investments, other than employee share ownership. However, these are the very investments that have been producing very poor or even negative performance over recent years. We should not forget that, in order to safeguard savers’ purchasing power, investments must, at the very least, outperform inflation. Otherwise, it is as if the value of savings capital were gradually evaporating.

Does investing in shares mean you have to like risk ?

The question is not so much choosing according to one’s temperament – cautious, moderate, gambler or adventurer – but rather according to one’s investment horizon. If you see your payroll savings as a capital sum to be used in the event of unexpected events or expenses, then diversified funds may well be the right choice.

If you are saving for retirement, as is the case for more than one in three employees, the long-term horizon should lead to choosing riskier but higher yield investments such as equity funds. Cyclical variations in equity markets tend to balance out over the long term. However, if you are putting everything into equities, it is best to choose the right time. As markets have risen sharply, the risk of a more or less pronounced fall in prices cannot be ruled out. You therefore need to be able to withstand that risk, while waiting patiently for better days. Unless you choose to make arbitrages, i.e. switching investments depending on the market. Something that requires a certain amount of expertise or luck.

What is fund management ?

For those who do not wish to rely on luck or their own skills, fund management is the solution. This is the choice, at least in part, made by half of the members of company pension schemes in France (PERCO and PER schemes). Fund management enables them to benefit from asset allocation that evolves automatically with ageing, and therefore their investment horizon. The savings of employees under the age of 40 are mainly invested in equities, whereas towards retirement age, the capital build-up is managed more prudently, gradually moving towards money market products and bonds.

How to be a responsible saver ?

More and more employees want their savings to be put to good use, financing projects that are in line with their values. Socially Responsible Investment (SRI) funds make it possible to invest in companies that are selected not only on financial criteria. They are also assessed on criteria such as respect for the environment, attention to employee well-being and governance. These funds have met with great success: +18% in one year making over €27 billion in assets under management. Solidarity funds have increased by 21%, reaching €11.7 billion in assets under management. These are necessarily among the range of possibilities offered to employees and are an original feature of employee savings schemes. Solidarity funds are managed as diversified funds, most often applying SRI criteria, and devote a small proportion of their assets, less than 10%, to financing social or public interest projects. This adds a human touch to employee savings and makes financial investments even more attractive.

Provided you are well informed… Digital technology gives savers the opportunity of monitoring and managing their accounts easily. Recent regulatory changes have tended to give savers more freedom in managing their assets, and in making withdrawals or exiting. However, the final condition for employees to feel fully in control of their payroll savings is to acquire at least a minimum knowledge of investment vehicles.