For some time now, plummeting bond yields have been a concern for investors in French ‘assurance vie’ policies. Are life insurers going to be able to pay policy holders an acceptable annual return when bonds offer ever lower or even negative returns?
These funds have to guarantee capital whilst paying a bonus every year. The only way a fund manager can be sure of meeting this obligation is to put the vast majority of investors’ money into French government bonds, thus funding government debt to the tune of trillions of euros.
As recently as 2007, they were paying an attractive 5% per annum net. This has now fallen to about 2.5% and are set to fall further, almost certainly to under 2% in 2016. Bond rates are at historically low levels and they should now really only be paying about 1%, but companies have been dipping into their reserves, as they fear that such a low rate would lead to a mass exodus from these policies.
This has led to concerns about the financial stability of these companies and there have been several developments.
Firstly, from January 2016, life insurers have been required to give details of policies with a value of over €7,500. This is both to help in the fight against money laundering and to test just how solvent these companies are. The French Ministry of Finance and the Governor of the Bank of France have also been consistently urging life insurers to lower returns on their ‘fonds en euros’. The insurers have failed to act and the government has now passed an amendment to Article 21a of the Sapin 2 law. This was voted on in secret (June 23) and passed virtually unnoticed - everyone was either on holiday or watching the football. And, of course the government were also ‘en vacances’ immediately afterwards in case of any awkward questions!
So the future certainly looks bleak for investors in ‘fonds en euros’ who are probably 90% of all French assurance vie policyholders.
What does this new law mean and how will it affect me?
It gives the Financial Stability Board (HCSF) the power to “suspend, delay or limit temporarily, for all or part of the portfolio, withdrawals or the option to switch funds”.
The implications of this are clear. Overnight and at the request of Governor of the Bank of France, the HCSF may prohibit you carrying out all normal policy operations, including withdrawals and fund switches.
In short, some or all of your assets could be frozen for “a period of three months, renewable”, in other words, for whatever time is required for the crisis to pass. Therefore it is entirely feasible that your investment could be reduced in value in order to avoid an insurance company becoming insolvent. Article L.612-33 of the Monetary and Financial Code provides the means for this reduction to be imposed and it is not known how this would affect the official guarantee of €70,000 for every assurance vie policy.
People are becoming disturbed and with reason. This law could allow the authorities, to disregard your contract and deprive you of all access to your money.
Clearly this is designed to protect insurers should investor panic set in and lead to mass policy surrender. Insurers are holding bonds with maturity dates of ten or even thirty years from now; trying to offload trillions of euros of bonds would be impossible.
So what should investors do?
The ideal scenario would be for investors to stay calm and avoid possible future difficulties by gradually switching from ‘fonds en euros’ to other assets such as unit linked multi-asset funds or property funds; investors are probably all too aware that if they they rush ‘en masse’ to cash in their contracts, they could actually cause the assets in these policies to be frozen. But is that going to stop them trying to be first in the queue and thus avoid the suspension of withdrawals? We shall see…
Despite all this, ‘assurance vie’ remains an attractive investment, especially in terms of its advantageous tax benefits. Therefore investors need to weigh up the advantages versus the obviously increased element of risk.
Fortunately, there are companies who offer alternatives to ‘fonds en euros’. There are also policies domiciled outside of France (in Dublin, for example) who should be completely immune to this French legislation.
So, more importantly, what should I do?
If you have an ‘assurance vie’ policy, contact Graham today for a no obligation assessment of your policy and if necessary, advice on how to minimise your risk.
TSG Insurance Services SARL, (The Spectrum IFA Group).
(ORIAS - no 07 032 493)’ and an accredited
‘Conseiller en Investissements Financiers’ (référencé par
ANACOFI-CIF no EOO2440).TSG Insurance Services SARL
Siège Social : 34 Bd des Italiens, 75009 Paris
Société de Courtages d’assurances. R.C.S. Paris B447 609 108 (2003B04384)
This report is intended simply as a summary of some aspects of French
succession law and inheritance tax. It is based on my understanding of
current legislation, which may be subject to change. No liability can be
accepted for any change of interpretation or practice relating to any
tax or legislative measure that may affect the accuracy of the content.