France’s Fonds de réserve pour les retraites (FRR) is approaching the development of a new investment model with more caution after the coronavirus outbreak prompted the government to suspend the further legislative passage of the country’s pension reform.
On the basis of draft reform legislation and an accompanying impact study published earlier this year, FRR is due to be turned into the reserve fund for the universal pension system that president Emmanuel Macron is targeting. This would be effective from January 2022.
As a buffer fund for a pay-as-you-go pension system, the new fund would have no foreseeable end date, and therefore a much longer investment horizon than FRR has had.
Long frustrated by the investment constraints imposed by its liability profile – FRR’s last scheduled liability payment is in 2024 – the €33.6bn investor was keen to begin working on the new investment approach that its rebirth as the Fonds de réserves universel (FRU) would allow.
Now, however, the context created by the crisis and the delay of the pension reform, announced by president Macron last week during a statement about COVID-19 measures, have injected an element of uncertainty.
“We are proceeding much more cautiously because of events,” said Olivier Rousseau, executive director of FRR. “In our view the delay does not mean at all the pension reform will not happen, but we do not know, there may be some changes, including for FRR and FRU.”
FRR has delayed a supervisory board meeting that was due to take place next month because of the lockdown the government has imposed to contain the spread of the virus.
At that meeting the board would have discussed a new strategic asset allocation in light of the government’s FRR-to-FRU plans, and it was felt that such an important decision should be considered in a face-to-face meeting rather than in a virtual meeting, which the lockdown would have necessitated.
Since a 2010 pension reform in France, FRR has had to make annual payments of €2.1bn to Cades, the government agency that refinances debt previously incurred by the social security in France. With 2024 marking the end of this payment schedule, FRR has made what it considers only limited allocations to equities and illiquid alternatives.
As at the end of 2019 FRR had a 36% strategic allocation to equities, of which 12% covered with put spread collar option schemes, and a bit more than 5% to unlisted assets, primarily private debt but with growing private equity, infrastructure and real estate components.
Its hedging portfolio of OAT Treasury bonds and investment grade credit accounted for half of the total assets and had a very low duration.
Equities drive near 10% gains in 2019
FRR’s invested assets gained 9.66% in 2019, mainly due to its return-seeking assets rising by 17.9%, in turn primarily due to equities.
Its high quality bond allocation gained 3%. In total, its assets grew by €1.1bn over the year, to €33.6bn as at the end of December. This is after FRR made its annual €2.1bn payment to Cades.
FRR’s annualised performance since January 2011 is 4.9% net of all expenses. Since the end of 2010, its performance and quality bond allocations increased by 84.7% and 33.4%, respectively.
Announcing its results for 2019, FRR also highlighted that it had renewed all of the active management mandates in its equities portfolio by selecting managers in particular with regard to “their ability to take concrete actions in relation to their portfolio on the environment, but also on the other social and governance aspects”.
It said that across its requests for proposals, it had asked 54 questions concerning climate risk, ESG, engagement, voting policy, and climate reporting.
FRR recently added its name to a statement developed by a trio of major asset owners – Japan’s GPIF, USS in the UK, and CalSTRS – about the importance of focussing on long-term value creation.