After the revolution, evolution
Hugh Wheelan reports from Paris The reality of the euro has hit home within the French pensions and investment domain. Anyone doubting its impact in shaping the country's retirement industry into an Emumould need look no further than the rapid evolution that began almost simultaneously with the currency 'big bang'.
The most prominent example of this pension modernisation, bearing an increasingly European hallmark, can be seen in the reforms early this year of the country's private first pillar body Arrco (Association des Régimes de Retraites Complémentaires).
From January 1, this year the 50 Caisses de Retraites (CDR), individual industry pension schemes under the Arrco umbrella, centralised their retirement system into a unified points system, with each point equivalent to the value of one euro against the French franc (Ffr6.66).
This is part of a process of simplification and homogenity we have been examining for years," says Picrre Chaperon, head of reform projects at Arrco. "The transfer of millions of accumulated pension rights into a unified, transparent system has been extremely complex, but it is essential that Arrco reflects modern retirement needs and concerns.
Tagging the points system to the euro signals that the French private pensions sector is now getting into shape for the single currency future."
Agirc (Association Générale des Institutions de Retraite des Cadres), the complimentary pensions system to Arrco, specifically for French middle and upper manager class 'cadres', works on a similar umbrella structure with around 39 CDRs in its fold, although it has operated a unified pensions points system since its inception in 1947.
One of the cornerstones of both Arrco and Agirc, and a tenet of the French collective (Répartition) retirement system is that in the case of unemployment or company closure, employees enjoy the same accumulated rights as if they were still working. Widows and widowers are also entitled to 60% of the pension rights of their spouses in the event of death.
The cost factor here is one of the central issues under the spotlight in France and set to be addressed by the long awaited Rapport du Plan, to be published this month.
Jean-Charles Willard, director of the actuarial and statistical department at Agirc, explains: "There are a certain number of financial realities facing the French retirement system which need to be urgently addressed. This is not to suggest that the system we have now will be diluted, because the collective calibre of France's present pension regime is unquestioned.
"However, the workers of today are paying for pension portions of a cake which, for demographic and financial reasons, is shrinking in the Arrco/Agirc domain - so clearly people are beginning to question what they are paying for as retirement levels dip proportionally against salary."
Willard believes, though, that the real crunch issue remains in the government social security pillar. "The budget defecit is very close to its liabilities and inevitably the public will be affected.
Pension provision is news again, and the government is keen to avoid a confrontation such as in 1995, when SNCF workers went on strike over an affront to their pension rights. With this in mind the Ffr2bn safety net fund the government has created is a symbolic gesture. We have calculated that the figure needed to begin with is at least in the region of Ffr150bn (E23bn), so it really is a drop in the social security ocean."
Vigorous contributions to the pensions debate are being made by former parliamentarian Jean-Pierre Thomas, on the capitalisation side, Jerome Cahuzac, French deputy minister, with a long-term savings plan proposal and French planning superintendent Jean-Michel Charpin, who in his recent report proposes a rise in social security contributions and retirement ages.
The buck stops at minister for economy, finance and industry Dom-inique Strauss Kahn, who has de-clared France will have an 'appropriate' retirement funding system by the year-end, "which will contribute to the mobilisation of national saving and the defence of French business".
Whatever Strauss Kahn decides, the Association Française des Regimes et Fonds de Pension (Afpen), has produed a checklist of essential elements it believes should be integral to any final recommendation (see box).
Vincent Vandier at Afpen, says: "It looks as if the Loi Thomas will be abolished and replaced by a Cahuzac-style tax attractive savings plan.
But it is imperative that any initiative improves the present demographic imbalance and is tagged to Mario Monti's forthcoming EC directive.
Subsequently, the Afpen checklist seeks to ensure that the government's retirement means correspond to the required ends."
The Arrco revolution in pension value and reporting does not, however, alter any aspect of investment regimes within the CDRs. Individual schemes generally have historic relations with insurers under which they invest their contribution surpluses, normally valued at between six and nine months of liability payments. Consequently, France's asset managers are closely following the pensions debate. This is understandable because, should France follow the path of pension fund capitalisation, figures offered by Jean-Charles Willard at Agirc show a potential investment market of Ffr25trn, with additional flows of Ffr1,000bn a year, against the comparatively meagre Ffr300bn-400bn being invested each year at present. And as a result of this French retirement industry evolution, coupled with the impact of the euro and the opening up of the European investment industry, French asset management is undergoing its largest ever re-evaluation.
Insurance groups are by far asset managers' largest clients, funded mostly by the Caisse de Retraites and private retirement insurance arrangements.
In total the securities market represents approximately Ffr8.5trn, with Ffr3.5trn of institutional money placed in OPCVM (Opération de Placement Collective et Valeur Mobilière) and FCPE (Fonds Communs de Placement Épargne) unit trusts, private investment of Ffr2trn also invested in mutual funds, and the remaining Ffr3trn of institutional money in segregated investment accounts.
Standard mutual funds are the prime French investment vehicle for insurers and thus most pension money, followed by money market instruments and then segregated funds.
On the bonds side the euro transition for investors has principally meant a straight switch from French-denominated gilts to euro paper, although analysts say the biggest shift has been into open-ended European corporate bonds and asset brokered securities. As Phillipe Lecomte, director of Invesco France remarks: "The French know their own government bonds like the backs of their hands and are looking for something a little different."
And the spreads are attractive, explains Alain Dromer, senior executive vice president at CCF: "A year ago interest rates were at 5% and bond spreads were between 25 and 40 basis points. Now interest rates are 3% and we are seeing up to 80 basis points available on corporate bonds."
However, for equities, Emu has focused investors' minds on clearly defined European strategies, says Antoine Jozan, senior vice president at AXA Investment Managers, holding Ffr570bn of mainly institutional money. "As the geographical borders disappear, we are developing investment on a sectoral basis. Our institutional clients have weighed up fairly complex euro 'in' versus euro 'out' and then European 21 strategies, to en-sure diversity and for the larger players any currency risk they may want to work with. Subsequently, interest in performance attribution services and reporting is booming, and we already have a separate team dealing solely with these issues."
Significantly, one of France's largest players - CDC Asset Management - was the first and so far only manager to be AIMR-compliant for investment reporting. "This transparency and professionalism is winning us business," says Robert de Puysegur, marketing manager. "If managers don't come up to scratch in the current European investment climate, then investors are just not considering them for money management."
Unsurprisingly, all of France's major investment managers say they will conform to AIMR or GIPS standards within two years. Jean François Pinçon, senior vice president of institutional sales at Indocam Asset Management, adds: "As stockpickers, with a growth, sector and theme philosophy, we are seeing roughly an equal split of Pan-European/euro 'in' strategies from our clients, principally because a Euroland strategy misses 50% of the European market cap as well as a number of important sectors such as pharmaceutical and retail, and important stocks like British Telecom. In the convertibles and small caps though, the money is still very much in Paris. It's a question of domestic insight and knowledge for these stocks, although there are signs of euro creep here also."
Pinçon adds that one of the issues facing the French market as a result of the euro is increased volatility as the market opens and volumes greatly augment. He also senses the development of a 'nifty fifty' of euro blue-chip stocks such as telecom and pharmaceutical securities being bought by French investors in a flight to quality, against a growing shift away from French small to mid cap stocks.
Specialist investment mandate interest is also rising, he says: "Interest in manager of manager funds is growing, and I see it very much as the future, although education is needed on the uses of derivatives and such products."
Pascal Duval, managing director at consultants Frank Russell, believes another important question is how far French institutional investors can now go with their portfolio bond/ equity ratios. "The European and French markets have remained attractive to French investors in the last two years, with a little emerging markets and Japanese investment. Post-euro there is still no shift to the US because of the currency risk, although French institutional portfolios are underweight in the US. So the real issue is euro in/out versus French asset allocation, and then how much equity should be in the portfolio. A likely ratio is about 60-70% in favour of gilts."
One of the small number of French managers with a global presence, Lazard Frères Gestion, says it is beginning to sell a number of very risk-defined segregated products to French clients, including high-yield instruments from New York and London.
Joseph Assémat-Tessandier, associate director, adds: "Significantly, what we are noticing is more rigorous and knowledgeable judgment by institutional clients on good investment processes, asset allocation within strict euro 'in' or 'out' parameters, and of course strong performance."
Finally, Assémat-Essandier believes the global reach of Lazards is also bringing in business, as French investors set their post-euro sights further overseas.
Invesco is another foreign player with a well-established 10-year French presence, picking up money on the back of international experience.
Distribution comes partly via third-party funds ($1bn) within banks and insurance companies, and of the $1bn Invesco France directly manages for institutions, half is in Sicavs and half in segregated funds.
However, Lecomte believes invest-ors should not be too hasty in leaving the French equity market. "The euro goose looks golden but don't forget France, because the market has performed well over the last two years with good sector spreads making it as attractive as a solely euro strategy." Not all foreigners moving to Paris have fared so well, though.
A number of niche players do appear to be gaining from the post-euro investment scene though. AXA-owned equity specialist Banque Worms, now managing Ffr2.7bn, believes its skill as a stockpicker on a strictly growth, European large-cap basis, is proving fruitful.
Phillipe Lesueur, head of research, comments: "As the market becomes more specialised, the issue of size and distribution muscle becomes less important, because we can pick up good business as a third party arm of banks and insurers. Significantly, our long-term sectoral benchmarking approach is in demand, particularly for pension money, which makes up a strong portion of our business. "We also manage about Ffr600m as a fund of funds manager, and feel we are at the vanguard of a trend which is going to snowball in the coming years."
On the other side of the French asset management fence, CCR Gestion, a filial of Germany's Commerzbank, is managing significant French institutional surplus pension money via the Gallic flavoured vehicle of money market funds. The euro's arrival has removed a large part of these currency trading funds' patch, alongside a definite shrinkage in outstanding market flows from 43.1% in 1993 to 32% in 1998. Nevertheless, Alain Tanneur, commercial director, believes the euro will prove to be a boon. "Emu means we have less barriers against selling funds cross-border, although individual country tax burdens remain.
And we can still operate via euro 'in' and 'out' currencies, although admittedly we will have to focus more and more on the dollar and yen as countries join the euro." The real battleground of the French asset management domain at present though, comes as a direct result of investment globalisation, with the euro proving a pivotal factor.
On everyone's lips is the question of how the French market will shape itself in the coming years, both to consolidate operations at home and compete for business abroad.
The recent merger of Société Générale and Paribas is being seen by many as the turning of the tide for mergers and acquisitions in an overcrowded sector.
"If French asset managers are to become serious global players," says Duval at Frank Russell, "there is really only room for amalgamation, leaving a maximum of four large companies, complemented by niche players. The mid-size companies have to go, because they don't have the capacity to compete at the top level, nor manoeuvre in the specialist arena."
Alain Dromer, senior executive vice president at CCF - mooted as the next French bank to undergo a serious shapeshift - sees things differently. "I believe there is room for about 10 French players to operate at a European level, although we will undoubtedly see banking consolidation and merger in the near future. One certainty here at CCF is that the nature and strength of the company - in particular the asset management arm, which was one of the first to be spun off from a mother company in France - will not be affected. Our top-down, thematic investment policy, rare in the French market, has worked well and we have always been a forward-thinking group and will continue to be so."
The upshot of such activity in the French market for consultants is the battle for the hearts and minds of French investors. Things have been hotting up, with claims and counter-claims over different styles of mandate selections between domestic and foreign advisers, as well as issues of conflicts of interest in complementary asset management business on offer.
Where none of the consultants disagree is that increasing demand for more globally focussed managers, complex asset allocation and investment transparency is pushing business their way.
On questions of RFP style, though, daggers have been drawn. Local players Finance Arbitrage and Fixage operate on a client-driven long list from which they remove managers unsuitable for the mandate.
"We know our market because the law obliges companies to have a French presence, so this is an appropriate method for selection," says Thierry Santot of AMR (Asset Management Ratings), part of French consultant Finance Arbitrage. "Eyebrows have been raised in the past though at the approach of foreign consultants breezing into France, and at some of the investment products they also sell, although I think they have modified their stance over time."
Duval at Frank Russell, counters: "Obviously we are extremely sensitive here to any conflicts of interest, but the important issue is that we select fund managers not manage funds - so the philosophy is identical, whether we are selected as a consultant or a manager of managers."
Herve Douard, associate director at Fixage, believes a middle ground will soon be found: "I think the French consultants are moving towards a more Anglo-Saxon style of consulting, because the developed market demands it - but what will not change is the domestic advantage we still hold."
The overriding message coming out of the pre-millennium French pensions and investment scene is 'plus ça change ...
plus ... the market will cease to resemble its former self'.