Formed in February 2003 but created in law in 2001, the Fonds de Réserve pour les Retraites (FRR) is a truly innovative development in France in that it manages assets ultimately to be used to support the pension system through a capitalised fund invested using a full-on asset allocation strategy. Moreover, it is distinguishable by its corporate governance and a supervisory board consisting of government representatives, social partners and other administrative authorities looking to implement FRR’s directives on risk aversion and investment management.
FRR says it has had to work in an extremely ambitious timeframe of 11 months, overseeing setting up the organisation, selection of strategic asset allocation, defining portfolio construction, drafting mandates and organising an international tender for offer to help it select 40-odd asset managers.
Split into three operating departments – administrative and legal, financial and risk control management – FRR already had some 26 members of staff at 31 December 2003. It took on a financial consultant between January and March 2003 to help draft its first tender for offer. In addition, it also chose two accountancy firms to work with alongside two law firms to ensure the offer complied fully with both French and European law. The fund’s IT systems were also put in place during 2003 with the aim of centralising its operations and monitoring its asset management.
The supervisory board debated the best strategic asset allocation for the fund and stipulated that it should be formulated in conjunction with a risk aversion policy. FRR used various hypotheses taking full account of different economic scenarios and the repercussions of an aging population. This ultimately led to the supervisory board unanimously approving a strategic asset allocation policy that encompassed a wide range of assets. Equities are to make up 55% of the strategy and include European and international stocks that are broken down into groups of small, medium and large companies. The remaining 45% is allocated to fixed income, including European and international bonds, credit and index-linked bonds.
Putting the portfolio together, FRR says it wanted to avoid the widespread practice of diversified or multi-asset mandates. Two reasons were put forward to justify this move: the desire to select bona-fide specialists for each individual asset class and the need to master the global allocation policy at fund level. FRR thus opted for a policy based on specialist mandates and believes index-linked mandates of considerable size allow for shifts in the market and reductions in active risk to ensure a favourable risk/asset ratio.
Once the structure of the portfolio had been decided, FRR began organising a tender for offer, including drafting its rules and guidelines, formulating first round questionnaires, organising the logistics and IT systems for processing and breaking down entries and defining how they would be marked. The offer was published on 31 July 2003 and FRR says it received 400 entries for the 12 ‘lots’ on offer by the deadline of 12 September the same year.
A selection committee comprising FRR’s chairman and four suitably qualified professional members analysed the responses with the actual mandates for each asset class being determined at the same time the second round questionnaire was drafted. This asked for a more in-depth response from the 137 short-listed candidates concerning their asset management processes and operating structures and went out in mid-December 2003.
The responses were then analysed with a fine tooth comb and the mandates were allocated progressively between April and July 2004. There are 38 mandates in total representing €16bn of assets to be invested. Alongside the manager selection process, FRR conducted two others – for a tactical overlay and currency manager and a broker, whose task it is to centralise the fund’s transactions during the launch period. These mandates, FRR says, were uniquely innovative in France.
FRR says 2003 was an extremely busy year for the fledgling fund in terms of setting it up. FRR sought to benefit from a ‘virgin playing field’ which meant it could be innovative with respect to established pensions practices in both France and elsewhere: its ambitious initial strategic asset allocation (with credit and small companies included from the outset); the innovation it showed in constructing its portfolio; the demands of its asset management mandates (no soft commissions, guaranteeing voting rights, the transparency of its reporting; monitoring the selection of intermediaries, etc). FRR says these factors all contributed to their final choices and the transition to a fully operational fund was finally made in 2004 when the first phase of investments took place.
Highlights and achievements
The fact FRR was able to get itself up and running from practically nothing but a name in just 11 months is astonishing. This process included defining the operation’s internal structure, its asset allocation policy, selecting accountancy and legal firms, two-stage beauty parade for the selection of its asset managers, allocating mandates and getting the systems in place for the fledgling fund to begin investing, and be fully operational from an administrative perspective.
The hard work FRR put in and its understanding of the investment markets and how best to exploit them under today’s conditions are equally commendable, especially as this is innovative and a radical departure from the traditional pensions provision vehicles in France.
FRR further distinguishes itself in the French market with a sophisticated corporate governance policy and board that includes all the relevant social partners at the highest level required to run a public service fund. Dividing the fund into three operating divisions gives each a clearly defined role and allows the risk aversion and asset management policies to be managed as equal entities. Moreover, FRR’s proactive and careful planning means it considered all important factors when assessing its risk and asset allocation strategies.
Opting for specialist rather than diversified mandates underlines its commitment to ensuring each asset class receives the best possible manager treatment.