Aticle 39 schemes : given up for dead but still alive and kicking !

Defined-benefit third-pillar pension plans based on article 39 of the French tax code attracted a lot of animosity. In the press, senior management benefiting from such golden parachutes were seen as a little too greedy thus inevitably arousing the most indignant reactions. European regulations accused the plans of undermining the free movement of workers. These grievances are now a thing of the past! Since 4 July 2019, a new defined-benefit system has appeared, better regulated and in line with European law. Let’s take a look at what’s new and what grey areas still exist.

Uncertainty as to whether benefits will be paid…now a thing of the past!

The European Directive of 16 April 2014 has finally been transposed into French law. “New version” Article 39 plans will no longer condition the payment of benefits on the employee still being with the company on retirement. The scheme can only make eligibility subject to a minimum length of service and vesting subject to a contribution period. The total of both durations may not exceed three years. The random nature of such defined-benefit plans that tied staff to their employer has now disappeared. Pension rights are now vested and certain. Despite these changes, contributions continue not to attract national insurance (Social Security) contributions and are non-taxable. Nevertheless, they will be subject to a flat contribution of 29.7% instead of the current 24%.

Golden parachutes, but now not so golden

The revamping of Article 39 schemes did not stop at the requirements of European law. A number of rules and upper limits have been introduced to prevent certain uses of such schemes seen as abusive. For instance, rights acquired over the year may not exceed 3% of annual remuneration whilst aggregate rights may not exceed 30% of average annual salary calculated over one’s entire career. Buying back previous years’ contributions is impossible from now on. These “signing bonuses” could amount to huge amounts that hit the headlines and contributed to the poor reputation of such “top-hat pension schemes”. Finally, all staff members must benefit from a retirement savings scheme of the Perco or Article 83 type.

What happens to existing schemes?

As from 1 January 2020, no new pension rights can be acquired and existing rights are frozen. This means that the amount of any benefits to be paid out on retirement is known but remains subject to the employee still being with the company when retiring from active employment. The law also provides for transferring rights from the old “uncertain” version to a new-type scheme but within the limit of 30% of the average annual salary of each employee. Making this choice has significant financial consequences. First off, a levy is imposed equal to the difference between the flat contributions that would have been due at the new rate (29.7%) and those actually paid. And then, how can one convert uncertain benefits into vested benefits based on firm contractual commitments when previously some of those benefits were expected to disappear because beneficiaries left the company?

A solution to this issue needs to be found quickly. No matter which option is chosen – outright closure of the existing scheme, transfer of rights or a hybrid solution – the employer will have to draw up an addendum and implement, without delay, the procedure for revising the scheme terms and conditions either by a unilateral employer’s decision or a collective agreement, after consultation with the works council.

Still some grey areas

Employers should therefore make haste and comply with the law even if there are some questions still unanswered. What about portability of these new schemes? Will extra time be given to deal with company legal representatives whose remuneration package cannot be revised by the end of the year? Who will make sure the upper limit of 30% for vested benefits is complied with? A circular is expected early October in answer to these questions and many more. At the moment, it is imperative to deal with the organisational, legal and financial issues. Tomorrow, we will need to take a deeper look at these revamped and simplified schemes, which are sure to be a key element in remuneration strategy for senior executives, in particular in the face of future pensions reform which will limit contributions, and therefore acquisition of rights, to 3 times the Social Security Annual Limit (known as the “PASS”.)