The investments will be mainly in French sovereign bonds (OATs) and treasury bills. The aim is to generate an income stream from maturing issues and coupons to help FRR meet its financial obligations to Caisse d’Amortissement de la Dette Sociale (Cades), the agency that refinances debt incurred to pay pensions in France’s social security system.
Since the pension reforms of 2010, FRR has had to pay Cades €2.1bn every year and will continue to do so until 2024.
In 2016 just over half (€1.26bn) of the €2.1bn owed to Cades came from liability-matching assets, €760m from the sale of equities, and €350m from sales of mandates for high-quality euro corporate bonds, according to FRR’s annual report for 2016.
Its cashflow-matching investments in OATs form part of its liability hedging portfolio, which accounted for nearly 49% of FRR’s total assets as at 31 December 2016.
The hedging portfolio also comprises investment-grade corporate bonds, and cash.
FRR launched the tender for the liability-driven OAT mandates in February last year. The mandates are for five years, with the possibility of renewal for a further year. They are for an initial estimated amount of €5bn, which will reduce over the period in question.