France’s €28bn public service pension scheme is lining up an increased investment in residential real estate, which would then be offered to its active members.
At the end of last year, ERAFP was one of several parties to sign an agreement allowing civil servants in the Paris region to reserve low-rent housing units. The units are from a property portfolio of a housing fund, Fonds de logement intermédiaire (FLI), in which ERAFP has a €60m stake.
The FLI offers each of its shareholders the possibility of reserving housing units for its beneficiaries or designated agents in proportion to its investment. In ERAFP’s case, around 600 housing units can be allocated to active scheme members in the coming years.
In its annual report for 2016, published in English today, the pension provider said the agreement was “proof that it is possible to combine the profitability of long-term investments on behalf of public servants” and that the “experiment” should be extended.
“Among other things, we will need to broaden such a mechanism as soon as possible to the hospital and local and regional authority divisions of the public sector,” it said.
“To go further, we need to continue our investments in the residential real estate sector, which fits in with our requirement for increased diversification of our investments.”
Earlier this year, ERAFP was given the go-ahead to raise its real estate allocation from 10% to 12.5%, and it subsequently put out to tender three mandates for €200m of investments in domestic housing. One of the requirements for the successful provider would be to help provide accommodation for civil servants.
A spokesperson for ERAFP told IPE the mandates would be awarded by the end of this year or early 2018. The deadline for applications was the end of June.
Since 2015, the pension fund has been pursuing a policy of trying to invest with a view to having a positive socio-economic impact, mainly in France and the rest of Europe.
In 2016 it nearly doubled the financing it provided to European small and medium-sized companies, investing €580m versus around €360m in 2015.
It is continuing the international diversification of its portfolio, which it was able to pursue as a result of regulatory changes in 2015.
As at 31 December ERAFP’s internal rate of return on the overall portfolio was 5%, up from 4%.
Meanwhile, in 2016 the calculation of the pension fund’s discount rate was changed to take into account a forecast return on equities.
Dominique Lamiot, ERAFP’s chairman, said: “Whereas the calculation formula had been developed before the process of gradually diversifying the portfolio of assets into equities, real estate, private equity and infrastructure, the scheme’s discount rate applied to reserves now reflects the balance between bonds and variable-income assets for which the board of directors now aims, thereby offering greater coherence.”
The discount rate, which is applied to reserves, was set at 0.8%, 20bps lower than in 2015. ERAFP noted that its discount rate is set at a conservative level compared with the practices of other European pension funds.
ERAFP’s chief executive, Philippe Desfossés, has been a vocal supporter of the need for pension funds like ERAFP to take a long-term perspective and for long-term investors to communicate returns accordingly.
In the scheme’s annual report, he said it was “absurd” to have large public pension funds – in particular in Japan, Sweden and the US – issuing quarterly results despite managing commitments over several decades, and that an eventual solution could be to produce and issue performance figures that are consistent with the length of a fund’s obligations.
“Through this report, we are initiating such an exercise by presenting, alongside the annual performance, a performance measured over a longer period,” said Desfossés.