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Special Report

ESG: The metrics jigsaw


Information is a special duty for creator of web

The CERN Pension Fund – the fund of the European Organisation of Nuclear Research – was set up in 1955 to insure members, beneficiaries and family members against the financial consequences of disability and old age of members, and death of members and beneficiaries. CERN is a non-profit research laboratory dedicated to partical physics.
The fund’s resources come from contributions from CERN and ESO (European Southern Observatory) and their members, from investment income, gifts and legacies. The pension fund is a capitalised scheme on a defined benefit basis. Members – both men and women – can retire at 65 with a maximum of 70% of reference salary after 35 years of contributions.
As part of an international organisation, the fund is not subject to Swiss legislation. Instead, the supreme body of the fund is the CERN Council, which is made up of representatives from 20 European member states. The fund is under the regulatory auditing authorities of a member state – until the end of 2002, this was the Spanish Court of Audit, and as of 2003, it has been the Austrian Rechnungshof of Vienna.
At the top of the fund’s management structure is the governing board, with 10 members and one observer, which usually meets six times a year. Four members are elected among members of the fund, five are designated by the director generals and the CERN Council, and the other is a representative of the Staff Association.
Below the board is an investment committee, an administrator to manage the fund, a consulting actuary, a consulting medical practitioner and the auditors. The fund’s 14 members of staff are well-educated, dedicated and motivated and each commands at least two languages. As well as the administrator, there are two administrative assistants, two internal managers, a portfolio analyst, computer engineer and computing assistance, two members for benefit services, one head of finance and three accountants.
CERN was the place where the web was created, and the organisation has a special duty to the open exchange of information. All its scientific results are public, and the pension fund follows the same spirit, with its web site giving access to the fund’s rules and regulations as well as the last annual reports.
In the past 24 months, the main changes have been in the administrative and regulatory fields. A deferred pension after five years of membership was brought in, and the technical interest rate was cut to 5.5% from 6%. In investment, a manager was chosen for the new asset class of high-yield, another mandate was awarded to a European manager while an old manager was dismissed for insufficient performance. Apart from this, Switzerland was cancelled as a geographical equity class and integrated into the European portfolio, the fund has an absolute return mandate for the first time, and it took the active decision to stick to 70% as the benchmark in Swiss francs for the currency overlay mandate.
The property allocation has been increased by buying new buildings in France and, for the first time, Germany; the chairman of the investment committee has been given authority to buy and sell derivatives, to improve the response to market movements.
Looking ahead to the next two years, the fund plans to rethink its asset allocation, re-examine the expected long-term return, look at the possibility of a liability benchmarkto cover pensions payment in the near term, and introduce a formal good governance practice.

Asset liability modelling
The fund updates its asset/liability studies regularly. It has no explicit policy on asset-liability matching, however, because the return on the equity portion of the fund – which is still a significant part of it – could not be forecast with enough precision. But, bearing that in mind, asset/liability is an important tool in managing the fund, as well as showing the sort of measures that should be taken to improve the funding ratio.

Investment strategy
The fund’s asset allocation, at the end of July, was 30% equities, 44% bonds, 12% property and 14% cash. There has been an important reassessment of the fund’s expected return, and this is still under discussion. The investment committee decides on asset allocation based on external advice; as a first step, tactical asset allocation is undertaken on a shorter-term horizon of one to three months.

Risk management
The fund takes the general view that risk should be correlated to performance, and that each unit of risk taken should be associated with extra performance. The fund does a value at risk (VAR) calculation every quarter, and risks which are not manageable are transferred if possible. The quality – and especially liquidity – of investments in bonds are carefully examined in the light of risk.

Highlights and achievements
There are three areas where the CERN Pension Fund has achieved a good standard – information to members, investment and asset-liability modelling.
Members are well informed by the detailed annual reports that the fund provides, the monthly information contained in the internal CERN Bulletin and through the annual general meeting which members can take part in. Information is available on the CERN web site. As well as this, each member receives information about his acquired pension rights.
On investments, the fund has tried to shift risk to positions where it can earn alpha. One of the areas where this is possible is currency overlay. This allows the fund to achieve a better allocation across asset classes and countries without bias. As well as this, the fund has tackled the area of financial reporting with some success.
Regarding asset/liability modelling, the fund has had, after three years of bear markets, an active examination of the parameters used. It has updated its economic scenario and now has to find ways to start involving employers and members of the fund, including the retirees. It has to find an even more active investment policy than the one it has. Having said this, of course, the fiduciary responsibility of the fund remains, and prudent man rules will continue to apply.

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