Paula Garrido looks at the CERN scheme
The European Organisation for Nuclear Research (CERN) in Geneva is trying to reduce costs. Forty five years after UNESCO decided to create the organisation, its pension fund is undergoing major changes in order to find equilibrium.
According to the 1998 annual report, benefits and contributions were still in balance in 1997, but last year’s level of benefits exceeded contributions by 17%. This resulted in a negative cash flow of more than Sfr22m (e13.8m) which will continue to rise during the next few years.
The fund, which started as a capitalised scheme providing benefits under its own law, has gone through several modifications since its creation. “The main change came into force in 1975 when a number of benefits were modified in order to meet what was more in line with the kind of benefits provided in the different member states,” says Guy Maurin, chairman of the investment committee of the CERN pension fund. “Recently we have increased the level of contribution to be able to maintain the long-term stability of the fund,” he says. “Every three years we have an actuary study to see the level of the contribution needed to be able to pay all the pensions until the last beneficiary dies.”
The fund has around 3,000 members – including members from an associated organisation, ESO – and, at the end of last year, almost Sfr6bn under management.
Members are permanent CERN staff and do not include visiting scientists. The number of these temporary workers is increasing. “We are moving more and more in that direction,” says Maurin. “The expectations are that by the year 2010 the number of people working here on a permanent basis should be around 2,000,” he says. This means that the organisation will reduce its staff by over 800 workers in the next 10 years. To compensate the fund for the financial implications of this staffing policy, CERN decided to add an additional Sfr105m to the amount owed from the organisation to the fund, which last year came to Sfr375m.
“When the fund was modified 10 years ago, the pension fund committee was transformed into a governing board with two representatives of CERN’s member states, three representatives of the management and five staff representatives,” says Maurin. The board meets once a month and
supervises the work of the investment committee.
The annual report says that with the decrease in active members of the fund and the increase in the number of beneficiaries, the sums allocated to the payment of benefits will continue to rise rapidly in relation to contributions. In that sense, the investment policy must be as prudent as possible and produce the highest possible return to take account of the increasing level of payments that it will have to provide.
“In the beginning, there was a lot of investment done by internal managers, and now we are trying to go more and more externally, so right now I would say that it is half-and-half,” says Maurin. “I think that it is very difficult in an organisation like CERN, which is basically focused on high energy physics, to dedicate members of staff to take care of the pension fund.
“And also, I believe that you can only find expertise externally. External managers have a more flexible approach, because we are not talking about people who are going to stay here for the rest of their careers,”
says Maurin. He thinks they have
to keep some internal managers because “something should be done from here and some experience must be kept in-house”.
However, the number of external managers to the fund has shrunk from 14 to around seven in just a couple of months. “We are trying to concentrate the managers’ activities,” says Christian Cuénoud, pension fund administrator. “We have grouped under the same company different portfolios to get a better deal in management costs,” he adds.
The investment committee approves the investment strategy which has undergone several changes. “We have achieved quite a good diversification,” Maurin says. In terms of asset allocation, 40% is dedicated to equity, 45% bonds, 10% real state and 5% cash.
London-based consultancy Independent Strategy gives them the tactical allocation. “We rely on their view on the market,” says Cuénoud. “We can go down to 30% in equity or up to 50%, depending on market expectations.”
The annual report underlines the positive results for the bond and equity markets, with the notable exception of Japanese and emerging markets equities, but now the situation is changing. “The Swiss market is very narrow,” says Cuénoud. “We don’t have Swiss bonds because we believe there are other bond markets which are more interesting,” he says. In terms of equities, the fund has Sfr150m invested in the Swiss market, “but this represents only 14% of our total equity investments”. “We are not home biased,” Cuénoud adds. “We are increasing our exposure in Japan and we have Sfr70m invested in venture capital.”
Cuénoud comments: “We are also trying to specialise two types of funds. One is more orientated to a geographical approach focusing on countries such as Australia, New Zealand and Canada.” The other type follows a sector approach investing in technology, biotechnology and leisure. “All this is done by the external managers,” he says. “We go for mutual funds that you find in the market.
“Taking into account the evolution observed in the market we could increase this sector approach,” Cuénoud says. “But it still too early to evaluate performance.”