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Tough constraints of the mutuality code

Michel Manteau describes the workings of Capimed to Hugh Wheelan
While the debate over pension funding rolls on in France a look behind the scene reveals a number of ‘hidden’non corporate capitalised
retirement plans, introduced following various amendments to the law over the years.
One such scheme, Capimed, is part of Paris-based CARMF (Caisse Autonome de Retraite des Médecins Français), the independent Caisse de Retraite (CDR) for France’s regulated doctors (médecins liberaux).
As one of the country’s fiercely independent ‘professions libèrales’, CARMF run its own pay-as-you-go regime and complimentary early retirement and medical plans, bypassing Arrco and Agirc – although investment of its PAYG reserves is subject to the same regulation.
And as a result of 1994’s Loi Madelin permitting capitalised pension funds with tax deductible contributions for non-salaried workers, CARMF set up Capimed as a top-up funded regime.
The scheme, currently with 1,280 members and valued at FFr160m (E152m), is entirely optional, but should an individual seek to join, the plan’s criteria stipulate they must pay at least FFr5,668 in contributions per annum to a ceiling of FFr56,680 in the schemes option A, or the double - FFr11,336 to FFr113,360 - in option B.
Michel Manteau, investment manager at CARMF/Capimed, says that both CARMF’s PAYG reserves and the Capimed funded scheme are run in-house through CARMF’s financial and accounting department, with investment carried out by himself for bonds and a small team comprising one equity and one property specialist.
And importantly, he explains, Capimed is characterised by a fixed annual guarantee rate of 3% return per annum for members, which, alongside government restrictions, proscribes the fund’s investment policy.
“When an individual subscribes to the fund, they obtain a certain number of points within the capitalisation mechanism. We calculate the pension rights through generational tables from 1993 and on the hypothesis that an individual will retire at 65 years of age.
“The fund also adheres to France’s mutuality code, which means it does not follow insurance regulation, but obliges us to have a minimum of 34% of total assets invested in French bonds.
“The mutuality status and 3% guarantee means that every year our mathematical investment provisions are reevaluated against these en-gagements.
“We have to ensure that in every case our investment products generate 3% so we can’t run too many investment risks - one of which would be buying securities at a price higher than their reimbursement value.”
Manteau says that taking into account the 3% level Capimed in-vests in assets which reflect the tight risk factor, meaning medium and long term bonds - and not just any bonds.
“The bonds we buy must have a price lower than the final value of reimbursement to ensure that
we don’t run any payment risks in the scheme.
“Hence the reason that 90% of Capimed’s assets are invested in French gilts, with 3% in convertible bonds and the remainder of the fund in equities.”
“It could be possible though to constitute a different provision if the markets are low and the price of the bonds is superior to the value of their reimbursement.”
The bond investment remains in the French market for the moment, Manteau says, because euro bond spreads do not have the required maturity yet.
However Manteau hopes that the mutuality code will pass over to a European standard level further down the line, which would allow further investment in Euroland bonds when the market matures.
“Euroland is still constrained, however, for a large part by budgetary problems, because although there is a single European monetary policy the numerous country political budgets still play an major role - but this should change.
“Furthermore, the euro bond spread market still currently lacks the maturity of its US counterpart, which we would require to invest”, he says.
“This will change when the market ripens for bonds and high quality issues and it becomes possible to do euro spreads with proportions extremely well calculated in risk terms.” But he stresses: “First and foremost the fund has to think about preserving capital, because of the background of mutuality. However, the 3% mutuality level was selected in 1994 at the launch of Capimed when interest rates on state borrowing were at 8.5%, which is certainly not the case today - so we would almost certainly look to diversify the bond investment if the conditions were right.”
The long term perspective of pension funding is also prompting Capimed to increase its portion of convertible bonds.
“Once again though we have to consider the constraints of the fund guarantee, so we buy convertible bonds which have a relatively low price against their reimbursement,” says Manteau. He adds: “For fiscal reasons, the reimbursement premium - the difference between the purchase price of the security and the level of pension reimbursement should not exceed 10%.
On the equities side the risk control factor is similarly high. “We invest principally in French large cap stocks, firstly because the mutuality regulation here hasn’t evolved and we are obliged to buy stocks quoted on a French stock exchange. If not, they are regarded as foreign stocks, and we can only invest up to 1.5% of assets in foreign stocks.
“Secondly, risk awareness is vital, because if we buy a share at a figure of say 99 and it is worth 70 at the end of the year we still have to undergo the same rigorous accounting provisions as we would for bonds.
“We hope this regulation may also change and that all stocks quoted on a Euroland stock exchange will become ‘domestic’ which would give us more latitude and allow us to diversify our equity investments.”
Manteau says it is also possible to have up to 30% in property under the regulations, but says for the moment Capimed has very little, although they do have convertible bonds in the property sector.
“We prefer liquid assets for the moment, but we could envisage a move to indirect property holdings in the future.
“For the time being though we have enough work researching and checking performance for our bonds and equities, and ensuring that we have paid sufficient attention to our accounting and guarantee limits.”
Manteau believes though that Capimed certainly reflects the thrust of the way the French pensions argument is going
“I think that taking into account the demographic issues facing France today and the fact that the country’s PAYG system will not be able to continue offering the same benefit levels, people will want
to make their retirement as comfortable as possible.” Undoubtedly, there will be some kind of complementary, personalised capitalisation system brought in alongside today’s system to enable them do so.”

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