ERAFP, France’s €39.4bn pension fund for the civil service, has updated certain parameters in its discount rate formula to give the scheme “full capacity” to exploit the investment leeway offered by changes to its regulatory framework in 2019, it said.

In particular the equity and real estate yield inputs were updated, with ERAFP saying the changes were also made to better align the parameters with “current economic and financial realities”.

Writing in its annual report for 2020, it said the adjustments were based on observed levels of return in the asset classes in recent years.

Net of costs the discount rate used to value the scheme’s technical reserve was set at 0.9% at the end of 2020, 20 basis points higher than the year before.

Before costs the discount rate is 1.1%. ERAFP said it calculates the discount rate using the regulatory minimum level of management costs of 0.20%, higher than the scheme’s actual costs, “by way of prudence”.

It said the scheme’s discount rate is set at a very conservative level, particularly compared with the practices of other European pensions funds.

In 2019 ERAFP secured changes to its investment regulatory framework that allow for further diversification, with the scheme gradually shifting its asset allocation towards equities, real estate, private equity and infrastructure.

Laurent Galzy, chief executive officer of ERAFP, referred to these changes as “crucial improvements”, with the subsequent adjustment of the technical management guidelines in 2020 representing “further progress”.

“The rebalancing of the treatment of the various asset classes in the calculation of the liabilities discount rate and the review of certain methods for calculating the excess economic coverage requirement enabled us notably to carry out our strategic allocation work within a very coherent framework based more closely on economic reality,” he wrote, adding that this was “without sacrificing the prudent approach that is the hallmark of the scheme’s management and enables us to look to the future with confidence”.

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New climate reporting indicator 

In March last year ERAFP became a member of the UN-convened Net-Zero Asset Owner Alliance. It has yet to publish its first set of interim targets, for the period to 2025, but according to CEO Galzy the roadmap for making the pension fund’s portfolio carbon neutral by 2050 “is shaping up”.

ERAFP is monitoring the proportion of its investment holdings that represent entities having made climate commitments in the context of the Science-Based Targets initiative (SBTi) framework.

The pension fund said it adopted the indicator “to strengthen the measurement of the impact of its investment policy on the climate”.

According to its annual report, as at the end of 2020 51% of assets were not covered by an SBTi commitment, 17% were covered by a commitment to set a science-based target, and 32% had set a target that was approved by SBTi.

Of these, 52% had a target for reducing greenhouse gas emissions in line with a 1.5°C scenario, 26% a 2°C, and 21% a “clearly below” 2°C.

Last year ERAFP won the jury’s prize in the third edition of international climate reporting awards run by the French government and think tank 2° Investing Initiative.

Real estate ‘catch up’ in 3% return year

In 2020 ERAFP amended its strategic asset allocation for the year by increasing the maximum proportion of real estate assets from 12% to 12.5%. The pension fund is particularly interested in increasing the availability of affordable housing for public sector employees.

As at the end of 2020, real estate investments represented 11.9% of ERAFP’s portfolio, up 1.3 percentage points from the previous year after the pension fund made “significant catch-up investments”. It made new investments in real estate of €630m, representing 30% of some €2.1bn in total in new investments.

After real estate, corporate bonds were the asset class whose share of the portfolio increased the most, from 22.6% at the end of 2019 to 24.1% at the close of 2020.

The allocation to private equity and infrastructure grew from 1.6% to 2.1%.

According to ERAFP’s chair, the weight of the pension fund’s investments in private equity, infrastructure and loan securitisation funds are expected to double on average in the 2020-2021 period compared with 2018-2019.

ERAFP’s invested assets returned 3% in 2020, making for an annualised internal rate of return of 5.4% since the scheme was created.

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