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FRR changes the market

While keeping their eyes firmly on risk levels, French retirement institutions are taking some innovative approaches to investment – a good sign for the consultants who are poised to advise them.
Thierry Brevet, head of Mercer Investment Consulting in France, says the business environment for pensions consultants is changing in France, espaecially on the investment side.
The new French reserve fund, the Fonds de Réserve pour les Retraites (FRR), is paving the way for big changes in the market, he says. Over the last few months, the e16bn fund, aided by Mercer, has awarded almost all of its assets to a wide range of managers and awarded a transition broker brief to Goldman Sachs.
“In the past, many institutional investors in France – typically retirement institutions which form the core of the market – have outsourced the majority of their portfolios to balanced fund managers,” says Brevet. Three years ago there was a big wave of outsourcing and most of it went to balanced mandates.
But the performance figures which have resulted from this wide-scale exercise have been so disappointing that the industry is now being forced to reconsider the relevance of the strategy. Generally, balanced mandates were awarded to single fund managers, rather than slice them into specialist portfolios, says Brevet.
“People came to the conclusion that it had been disappointing at the same time we started to work with the FRR. FRR tried to find best in class managers within every asset class,” he says.
Mercer spent a lot of time discussing these issues with the FRR team. “You never find a perfect solution – it’s always a compromise,” says Brevet. But basically, the idea was that the new fund would need to have a specialist structure. Central to this would be the defining of the global risk budget. Once this had been laid down, then it would have to be decided how much of this risk budget individual managers could have.
Mercer suggested that passive management should be used in place of investment classes where it was very difficult for active managers to outperform. Instead, the risk can be used in areas such as Asian markets or mandates awarded to satellite investment portfolios like mid and small caps.
This approach to asset allocation is rather new in the French market, says Brevet. “It’s something we’ve been working on at Mercer for some time. People are thinking more and more about all components of the risk chain… They also understand that if you make more bets and smaller bets then the diversification of the sources of added value tends to be enhanced, thus increasing the chances for the global structure to outperform steadily.”
Michel Piermay of Paris-based consultancy Fixage also sees demand from pensions clients changing in terms of the mandates being put out for tender. “Balanced mandates are being more and more replaced by class RFPs,” he says.
Brevet says consultants in France have also seen a great deal of business as a result of the changes in accounting standards. This and other regulatory changes have given momentum to the pensions consultancy market. Also, there is still much discussion about defined benefit pension schemes.
“So there’s a trend to reshape these schemes…we are doing a lot of work with companies to find new funding solutions,” he says. “Also, investors are asking more questions about asset liability matching.”
Vincent Puche, consultant at Hewitt in Paris, says the French pensions market is immature and is bound to expand. Changes in regulations and investment vehicles available create more demand for the services of consultants.
For any consultancy firm operating in the French market, it is vital to understand the culture and how the domestic retirement institutions make decisions. Hewitt’s Paris office is a consultancy born of a merger two years ago with local investment consultancy Finance Arbitrage. Puche says: “We remain French and we have our own approach to special clients,” but the resources available from the Hewitt’s international network are valuable.
“It is important to understand the French culture; when you do an ALM study, we think of the interests first,” he says, explaining that clients tend to be mutual insurance companies, which are not-for-profit organisations.
Piermay also believes it is helpful for a firm to be able to offer clients the benefits of being both domestically oriented and internationally aware. “It is very useful to be local and global,” he says.

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