At the beginning of 2006, those who studied the investment policy of French pension distribution funds, the caisses de retraites par répartition (CdRs), were picking up signs of the start of a new phase.
In effect, if retirement pension distribution - the mainstay of pension schemes - remains the basis of the French system, the widespread implementation of the principles of funded distribution by various compulsory PAYG systems and by the state means that financial assets are accumulated faster than under a system of capitalised, or fully funded, pensions.
As is logical, this accumulation is accompanied by a strengthening of the regulations and by a much more professional attitude among asset managers.
A year after this assessment, let us review the key points in the management of the financial assets held by the CdRs in light of what happened in 2006 and of the most recent trends.
The total value of assets invested by the CdRs was in the order of €100bn at the end of 2005. Under the twin drivers of the rise in the markets and the sustained growth in the capitalised flow, the estimated growth for 2006 was considerably above 10%. This rise exceeds the approximately €90bn for the individual and group-funded pension systems that are not subject to legal obligations.
In 2006 there were no major changes in the three most important systems of financial regulation affecting the sector - the AGIRC-ARRCO rules for supplementary pensions for wage earners, the state regulations applying to the pensions reserve fund, the FRR, and the social security rules for other schemes, particularly those affecting the unwaged.
However, the publication of a new version of the AGIRC-ARRCO rules, which apply to more than €50bn of assets, is scheduled for later this month. To no-one's great surprise, the rules are to be "opened up" to allow access to alternative types of management, to structured products and to products designed to improve the speed with which managers can react to developments.
The financial management of the CdRs can often be seen as the implementation of the intentions of ‘political' bodies elected to fulfil a professional role, which is becoming a delicate one in light of the growing technical complexity of access to the financial markets. As the CdRs in this sector become more complex internally, the internal financial administration system tends to become more formalised,
and there is an increase in technical complexity and in the transparency of procedures and of the system of supervision. The FRR's practices may serve as a point of reference in this matter.
As regards supervision, since 2002 the social security authorities have provided for the carrying out of regular external financial management audits intended, in particular, to verify that the internal processes provided for by the government's regulations are in place and being applied. These audits are a powerful incentive to rationalisation and professionalisation. However, it is a struggle to make this policy a reality.
A final point should be noted. Increasingly frequently the entire portfolio of a particular institution is being entrusted to a single custodian or agent. This formula makes it easier to obtain real-time access and discover the situation of the portfolio anywhere in the world, and it also brings about economies of scale.
The number of invitations to tender issued by institutional investors remained stable in 2006. The CdRs are active in this market, and 60% of these RFPs were handled by external consultants acting as intermediaries, a fact which confirms that such consultants are playing an increasingly important role - the intention being to have investment processes handled more professionally.
Another growing trend concerns the choice of investment vehicles. Ucits funds are more often preferred, to the detriment of mandates, but above all of dedicated unit trusts (FCPs). The appearance of institutional holdings within Ucits makes it possible to reduce management costs to a level close to that of the dedicated FCPs, while allowing greater freedom of movement. According to the annual study carried out by the Amadeis consultancy, 58% of institutional investors are expecting to increase the part played by Ucits in their portfolios in 2007.
The range of management companies retained following invitations to tender is widening, which is in accord with the research carried out by specialists and
the selection of more volatile investment vehicles.
The changes to the AGIRC-ARRCO regulations illustrate the search for diversification and the attempts to open up the investment scene for the CdRs, although still within the framework of the prudential rules laid down by government regulations (the OECD system, congruence rates, the use of developed products as cover).
Two points in particular may be mentioned - a growth of interest in alternative management and a demand for dynamic financial products, for which the performance objective takes precedence over the means by which it is obtained. Alternative management thus seems to be making its appearance in the practices of classical management. The first absolute return bond products also appeared in 2006.
Two trends can also be detected in asset allocation: the development of the core/satellite approach, to the detriment of diversified mandates or funds considered as not sufficiently dynamic; and the increasing importance of equities, although the classification systems vary widely depending on the sector. The FRR has shown the way with 55% of its portfolio in equities, whereas the AGIRC-ARRCO remains at 33%. These differences can primarily be explained by the nature and the background of the reserves involved, which are not comparable.
In addition, the socially responsible investment (SRI) sector is arousing interest with SRI bond vehicles making an appearance in 2006.
On the investors' side, following FRR's example, which treats SRI as a separate equity class, the new supplementary civil service fund (ERAFP) has decided that all its equity investments would comply with SRI standards. The ERAFP has developed its own SRI plan and it has launched a successful RFP.
In view of the value of the assets which are accumulating and the importance of the role that they will play in the future equilibrium of the various systems, this financial management activity, which was never traditionally at the heart of the pension sector, is being structured and made more professional, in particular through the generalisation of external delegated management.
This type of delegation makes it possible to structure allocation and supervision processes, and to gain access to the most technical classes of asset, which from now on will form part of the investment scene of any well-informed administrator.
Jean-Claude Angoulvant is an independent consultant and former CEO of the legal pension institution of the French insurance intermediaries (CAVAMAC) and Frédéric Petiniot, managing director of Amadeis, a consultancy for institutional investors