Fonds En Euros
Recently, we have been asked our opinion of Fonds en Euros, which are French Euro funds held by life assurance companies, which pay a guaranteed return. The contracts can be quite long, eight years or more, depending on the objective of the contract. The return is usually based on the government bonds which the insurer actually purchases when they invest your money.
These funds invest in government bonds, upon which the returns have reduced over the years. I am sure that many readers are aware of the fact that while Italy, Spain and Greece are frequently paying much more interest on their bonds, because of the perceived risk of investing in these countries, the return on French and German bonds has dropped significantly. Over the last 10 years, the yield on such 10 year bonds has reduced by between 2.25% and 3.5%, and even on shorter term bonds the interest rate has reduced significantly over the last three years.
This rather begs the question - when a yield is guaranteed, and the yield received from the investments is reducing, how is the insurance company managing to pay out the return, as well as the guaranteed return of capital at the end of the contract?
Even the Federation de France de Assurances (“FFSA”, the French Federation of Insurance Companies) has published details regarding nominal returns as a percentage of Fonds on Euros from 1990 to 2011. In 1990, the yield was around 9% per annum; however, this has dropped year on year until it is now approximately 3% per annum.
While such investments produce a guaranteed return of income, in many cases paying more than many bank accounts, you should consider the following:
- How long your money will be tied up for?
- How liquid is the investment if you wish to access your funds?
- How sustainable is the insurance company’s position?
There are also changes afoot as a result of EU regulations which are due to come into force in January 2014. Known as “Solvency II”, this will require insurers to have a specific solvency margin when they invest in stockmarkets. With the lowering of yields, but having to pay out guaranteed returns, this change in the rules may have a knock-on effect for insurance companies, given that they may not be able to invest in stockmarkets to boost the performance of their Fonds en Euro.
In France, there are laws regarding the governance of these funds designed to make them “safer” vehicles for investors. There is a guaranteed fund for life insurance in France, the Fond de Garantie des Assurances des Personnes, which caps the amount that is payable to a policyholder in the event of the life assurance company collapsing at €70,000 per person, irrespective of the number of contracts held by that individual.
Overall, there are several reasons why we would suggest that individuals carefully consider making such an investment:
• Most insurers are not keen to disclose information such as composition of their Fonds en Euros, their exposure to European government bonds and any financial ratings.
• As insurance companies are required to undertake less risk and maintain specific solvency margins, they may be less inclined to invest in stockmarkets. Stockmarket investment could potentially boost the performance of such funds, so without it there is therefore less opportunity for growth.
• Such investments are not particularly liquid, given that they may be held for eight or more years, and there may be conditions or limitations regarding disposal of the funds which may affect your ability to extract your funds if you require money urgently or for any specific reason.
• As the funds are required to pay a guaranteed return, if the company is not making such returns, it may have to dip into its own reserves, which may affect the solvency of the insurance company in itself, and thus its ability to pay out if it should ultimately become bankrupt. The guarantee of such a fund is only €70,000 per person, and thus may not offer you the protection you require.
• The yields from such funds are subject to social charges on an annual basis in your hands if you are French resident, at a flat rate of 15.5%, unlike the normal position of funds held with insurance companies (where only the growth element of any withdrawal is taxed). So, while it may appear that you are receiving a good return on your investments in this day and age, once the tax is and level of growth is taken into account, there may be more tax efficient investments available to you.
There are alternatives to such investments, and we would urge individuals to look at what they have, where they are hoping to be, and what they are hoping to achieve. You should consult with a wealth management and tax planning firm like Blevins Franks about your specific situation.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
27th August 2012