The priorities of French savers when saving for retirement
The following article is based on the results of a survey undertaken by BNP Paribas Asset Management and the CICERO Group, an international communications agency specialised in the corporate and finance sectors. This joint survey targeted 2 000 people, representative of the French adult population during June and July 2015. Via the internet, respondents answered 47 questions about their savings priorities and their preferences with regard to various investment options, in the context of preparing for their retirement.
1. There is a major mismatch between the performance objectives of savings for retirement and the products in which French savers are investing for retirement.
The survey shows that French savers tend to invest in short-term products even when they have a long-term investment horizon. This is detrimental to the performance of their investments because it means they forego significant additional performance potential. Indeed, when saving for retirement, even in a low interest-rate environment, this research suggests that French savers prefer to invest in short-term investment products, sometimes resulting in them earning negative real interest rates on their savings (when the effect of inflation is taken into account).
Figure 1: An estimation of the cumulative loss of purchasing power for a saver earning the EONIA interest rate for the period from July 2010 to July 2015
Source: BNP Paribas IP as of 15 September 2015
Yet the financial objective of saving for retirement should be, at the very least, to ensure that the purchasing power of the money invested is preserved at retirement; in other words, to achieve an annualised return above the annual rate of inflation.
Less than half of the French population saves for retirement. And when they do so, 48% of them use current and savings accounts. Their next preferences are to put savings into euro-denominated life insurance (‘assurance vie’) products (Not, as the name implies, primarily a life assurance policy, but a product type specific to France – essentially a wrapper for investments that provides a tax-efficient way of protecting one’s savings) and/or into buying their own home.
When savers were asked about their preference for saving via short-term products, the reasons they gave for their approach were (% shown in the three following points is the average across both male and female respondents):
- A need for liquidity and quick access to their savings (45%) - A perception of a lack of risk (38 %) - The apparent simplicity of the products in question (29 %).
The overall impression the survey gives is that the financing of retirement is to be built up from what remains of overall savings in the absence of any major or unexpected event that would require a rapid, or even immediate, liquidation of invested capital with no capital loss. The economic crisis and rising rate of unemployment have exacerbated this common trait among French savers.
2. The way to reconcile savers with risk-taking is through a dose of capital protection
A certain number of savers (39% of men and 33% of women), say that they are prepared to invest in long-term products, that is to say products with riskier components, in exchange for total capital protection, or even partial protection of the capital (30% of men and 27% of women). Better tax breaks would also be a significant motivator for 37% of men and 25% of women.
So what should the recommendation be to those willing to invest in risky assets?
1. French savers have abandoned equities, proof of their strong aversion to risk.Nevertheless, equities remain the long-term investment asset class par excellence. Indeed the longer the investment horizon, the less likely the risk of capital loss and the stronger the probability of earning the risk premium. In addition, planned, regular savings help to smooth out equity market volatility.
2. Capital guarantee solutions are not recommended in such a low interest-rate environment
In current interest-rate conditions (10-year zero coupon rate at 1.13 % as at 31 August 2015), 90% of one’s investment would have to be used to guarantee the invested capital at 10 years, which would imply a low participation in risky asset performance. If we assume that the remaining 10% is invested in shares and that these double in value over the 10-year period, that would represent a cumulative gross return of 20% over the period, or about 1% annualised if one takes costs into account; i.e. an investment that would not be preferable to short-term products and that would bring greater risk (see article “Guarantee, but at what price?”).
3. Capital protection solutions via a new-generation horizon fund
Not consistently providing full capital protection allows considerable flexibility. Indeed, on the one hand it allows exposure to higher risk assets and therefore a higher performance potential. On the other hand, a new generation of horizon funds can deliver levels of protection in excess of 100% of the capital, thus ensuring minimum performance at maturity if rates are higher.
This type of solution appears to address a number of investors’ concerns.
- They are simple and made-to-measure: horizon funds allow investors to simply invest in a product whose risk profile is consistent with their investment horizon
- Accessibility and liquidity: These are open products and thus allow savings to be quickly accessed at market value, i.e. with either a capital loss or gain
- Capital protection: The principal is protected until maturity, evidenced by a net asset value protected at maturity, which can only be revised upward
- Visibility of one’s available capital at maturity, published daily on the internet
- Performance potential: thanks to a significant exposure to risky assets
- Transparency: dedicated website with FAQs, factsheet, simulators, protected liquidity value, performance
Ideally of course, savers should invest in this type of product via a programmed saving plan, which further reduces the risk.
3. French savers know that they’ll have to continue investing once they are retired
Around two thirds of the French savers who participated in the survey said they intend to reinvest or maintain their investments once retired.
In other words, one does not die the day one retires and life expectancy is about twenty years, making for a long investment horizon. The income-replacement rate continues to fall - it is less than 50% of final salary for the generation of 1985 versus 70% of final salary for the generation of 1945. This loss in income has to be offset by the additional income gained via savings.
Just under 30 % of our respondents say they are interested in products providing regular income.
The survey suggests that French savers, once retired, would maintain their attitude to investment risk. Some retirees draw on their savings account as and when they need cash. Others seek to draw as regular an income as possible from the savings they have made.
What should we recommend to new retirees?
One must have a mix of precautionary savings and income products.
Today, given the extremely low levels of interest rates, the only solutions for delivering a significant income are products incorporating exposure to risk assets with income, for example high-dividend equities (it should not be forgotten, for example, that the CAC 40 has so far yielded dividends of about 3% in 2015), corporate bonds or even some sovereign bonds.
Some diversified funds aim to distribute an annual coupon of 4% (often via monthly coupons). This can provide a supplementary pension income, while maintaining the objective of adding value to one’s invested capital.