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FRR invites bids for ‘new generation’ cash flow matching mandates

France’s €36bn pension reserve fund is looking for managers for up to €5bn in cash flow matching mandates for investment mainly in French government bonds (OATs) and Treasury bills.

Selected managers will also be required to optimise the overall returns from the €5bn mandate until 2024.

This is when the fund, Fonds de Réserve pour les Retraites (FRR), will make the last of 14 scheduled €2.1bn payments to Caisse d’Amortissement de la Dette Sociale (Cades), the agency that refinances the debt incurred to pay pensions in France’s social security system.

Olivier Rousseau, member of the executive board at FRR, told IPE that the mandates were FRR’s “new generation” of cash flow matching mandates.

They will replace the “first generation” of mandates that expire at the end of this year and early next year.

These came about in connection with an overhaul of FRR’s business model following pensions reform in France in 2010. This significantly changed FRR’s liabilities, bringing forward drawdowns and introducing the fixed annual payments of €2.1bn until 2024. The fund’s inflows, mainly from tax, were completely cut.

It introduced a liability-driven investment (LDI) strategy as a result of the reform, which included mandates for liability-matching French Treasury bonds.

Rousseau said that the new mandates were very similar to the ones awarded in late 2011, except that now FRR wanted the selected managers to make payments a few days in advance of the annual Cades payment date of 25 April.

In addition, under the new mandates FRR would allow the managers to sell Treasury bonds when their residual maturity drops to less than one year. At this point the managers would be allowed to invest into bank certificates of deposit or other low risk instruments, said Rousseau.

FRR had been doing this itself, but was embedding this in the new manager mandates to make things simpler from an operational point of view.

Rousseau said that FRR had also been thinking about the possibility of launching cash-flow matching mandates investing in instruments other than French government bonds, such as investment grade credit. This would be a first for FRR. No decision has been taken on this, however.

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