An exciting aspect of the European pension industry in recent years has been the attempts by governments to reform their pay-as-you-go systems and encourage the formation of capitalised funds to help bear the burden of providing post-retirement incomes for today’s employees. They may look to mature capitalised markets like the Netherlands and UK, but that merely gives them models. But many are taking the concepts and designing complex and comprehensive new systems of their own. Such is the case with France’s COREM, a multi-employer scheme managing €4.2bn for 259,000 active and deferred members and 32,700 pensioners.
COREM is effectively a hybrid defined benefit/ defined contribution scheme. Membership is voluntary and open to anyone wishing to join. “Each member begins the year by deciding how many pensions units he or she wants to acquire during the year,” the scheme says. “How much each unit costs is then calculated on the basis of an actuarial valuation that considers the fund’s technical provisions.”
The technical provisions cover the value of the minimum annuity COREM would be able to guarantee against the units the member acquires during the year. “This gives us the technical rate,” it says. “In 2005, the rate was 3%. In 2006, it is set at 2.95%.”
COREM claims that this structure allows all its members the minimum guaranteed return they would get for what they put in. Once the rate has been determined, the board considers the scheme’s net asset performance before deciding whether there is room to increase the technical rate by including part of the investment returns.
“In 2005, the net performance returned 6.52%,” COREM notes. “This was sufficient for COREM’s general assembly to approve a 1% hike in the guaranteed minimum return. So in effect the 3% each member earned automatically for the money they put in increased to 4% for last year.”
But COREM’s innovation does not stop there. The difference between the 4% guaranteed annual return and the 6.52% net return on investments is used to improve the scheme’s funded position, which has increased steadily since the scheme was founded in 2002. At the end of its first year, COREM’s funded position stood at 81.5%, a year later it was 85.5%, in 2004 it had grown to 90.2% and by the end of last year it had reached 93% - a level that many funds in the more mature and experienced pension fund markets would envy. The levels are calculated using the 3% discount rate the French financial watchdog imposes for a scheme’s liabilities. Even discounting 3.4%, on current performance, COREM claims that soon it will reach a massive 100.06% funded level.
That’s the structure. What about the investments? “It’s well worth noting that the 6.52% we regularly quote here is the net performance,” COREM says. “The real performance level for the returns on our investments was actually 12.03% last year.”
COREM’s proactive approach has seen it adopt an active management policy for the difference between the net and real return rate. This, it says, allows it maximise the return potential on its investments through tactical asset allocation. “It’s all about how to secure the optimum capacity of the fund to meet its long-term future obligations while at the same time being able to distribute part of its current performance,” COREM states.
But maintaining an efficient management structure depends on COREM supporting relevant computerised simulations charting the development of its liabilities and investment performance. Originally, it used basic assumptions like cash flow, returns, liabilities, longevity, probable age or retirement and death, and pensions payouts over a 40-year timeframe to give it an idea of its liability toward each member, COREM says.
The projected cash flows this method highlighted were then used in a stochastic model looking at each asset class to determine the best strategic asset allocation. However, recently COREM says it has invested considerable time and money in the development of a new tool to test both the assets and liabilities in a wider multitude of scenarios that give a clearer picture of the long-term risks it needs to take to ensure it remains solvent and keeps all its liabilities covered efficiently. It calls this tool Stochalis and it takes COREM to a higher level by giving it a clearer picture of the funded position it needs to maintain as a scheme, not just what it needs to make per member.