The French pensions industry is currently concerned with two new insurance products that are being introduced: the plan d’epargne retraite populaire (PERP), and the plan d’epargne retraite complementaire (PERCO), according to Vincent Vandier, executive director of the French Pension Funds Association (AFPEN).
The PERCO, a DC system funded by corporates and available to all employees, and the PERP, an individual system based on a life assurance policy, are non-state systems into which employees can pay to augment their state pension.
The entities are part of the government’s attempt to take the pressure off the state pay-as-you-go pension system that the Pensions Advisory Council, the Conseil d’orientation des retraites (COR), found would show an €11bn deficit by 2020, growing to a €37bn shortfall by 2040 if reforms were not undertaken.
They are almost like British trusts, Vandier says, operating as segregated accounts, but it is far too early to assess how the new products are affecting the pensions sector. “We will have to wait to see what developments there will be from the insurance side. We will need at least five years to assess this.”
Vandier adds: “In terms of PERP and PERCO there are many different types of product, from life annuity to deferred annuity to products which are called savings transfers to life annuities,” he says. “We have the possibility to mark-to-market, and that type of product has time be developed.”
But traditional funds are satisfied with their performance. Union Mutualiste Retraite (UMR) posted a return on assets of 7.34% net, says investment director Vincent Ribuot.
“This was achieved through very active asset management on all asset classes,” he says. “We initially determined a strategic asset allocation with the help of Mercer Investment Consulting to closely match our long-term liabilities and reduce short-term volatility. We have created an internal division dedicated to ALM.”
UMR’s strategic asset allocation is up to 70% in bonds and interest rate products, 15% in equities, 5% in alternative investments and 10% in real estate. “The bond portfolio is managed 100% in-house and very actively,” says Ribuot. There have been more than €4.6bn transactions for a total portfolio of about €4bn, he says.
The pension fund invests mainly in corporate bonds, with 75% of its bond allocation falling into this category. The remaining 25% is invested in ultra long-term government bonds, says Ribuot, with durations of 30 years and over, and with a minimum rating of A-.
Looking ahead, UMR is worried about the possible effects of new legislation in the pensions sphere. “We are concerned about the impact legal changes could have and especially those concerning stress tests as we are a very long-term investor and as such we are not concerned by short-term fluctuations,” says Ribuot.
The French reserve fund for state pension payments, FRR, is still in the anomalous phase of initial investment. It was established to help offset the budgetary pressures from the pension system in years to come and financed by the proceeds from privatisations and other state sources, with the money being put on the market.
“We are still in the process of portfolio activation, so the performance of the fund is not very meaningful,” says Antoine de Salins, member of the executive board. “Our strategic benchmark which was defined by the supervisory board in April 2002 is not yet applicable to the executive board,” he says.
At the end of last year, the FRR had activated around €6bn of the fund, which totals €19bn. The asset manager selection process took place and in June 2004 the activation process began. Performance on the part of the fund that has been activated was around 10%, although it is too soon for the figure to be meaningful, says De Salins.
The reason for this relatively high return was the FRR’s tactical decision to give priority to activating the equity portfolio, and the equity market performed quite well in 2004s.
The activation is continuing and significant progress has been made, he says. “Up to now, we have activated all the equity mandates,” he says. The strategic benchmark for the reserve fund is 50% equities and 45% bonds, and this is subdivided into 12 strategic asset classes.
Total assets of the fund will probably be around €25bn at the end of this year, taking account of the new cash that will be allocated to the fund and new resources, says De Salins. “About two-thirds of the total amount we had at the end of June will have been activated,” he says. This means around €15bn.
“We remain quite cautious about investing in bond mandates, particularly in euros,” says de Salins.
Currently, the fund is focussing on two main goals. The first is its recent launch of a new tender for SRI mandates; about €600m will be allocated to this. The second is to launch a private equity programme, and this is due to be done at the end of the year.
De Salins emphasises that although external asset managers are used for the mandates, the FRR manages the tactical allocation internally.
“We hired State Street as the overlay manager, but we take the decisions,” he says. This includes the rebalancing of all asset classes and all the bets that the strategic board can take in order to take advantage of the macroeconomic situation. These decisions are taken internally and implemented by State Street, he says.
Strategic asset allocation is also done internally. “But we outsource stockpicking, which is why we have fund managers for very specialised mandates,” he says. The fund also outsources the custodian business and administration. FRR has 35 staff.
Michel Piermay, president of Paris consultancy Fixage, says that one of the main issues over the past 12 months has been that French corporate pension funds – defined benefit schemes – are changing, as a result of the so-called Fillon law. They are either changing to institutions de prévoyance or the investment is being externalised to a life insurance company. In either case, the new money is going into defined contribution systems.
The partly funded caisses de retraites have managed to improve their reserve level recently, he adds.
Among the main items on the agenda for French pension funds are the new accounting rules – IAS 19 – for corporate pension funds and IAS for insurers, says Piermay.
“A new pension fund has just been created for public officers, the ERAFP, to take into account their bonuses, which are not concerned by the existing systems,” he says.