Will the French pension scheme decree published last 9 May by former president Francois Hollande’s government be amended or simply withdrawn?
The text, which is to be implemented on 1 January 2018, provides stricter organisational rules, including a tightened investment framework, to the French pension schemes (caisses de retraites) managing assets on behalf of ‘liberal professions’ and relying on a pay as you go model. A total of 18 pension schemes enter into the scope of the law.
The origin of the text dates back to 2013 when the General Inspectorate of Social Affairs (IGAS) shed light on poor management practices of certain French pension schemes of liberal works in a report.
The reform that was built on the basis of the IGAS’ report carries controversial measures for the concerned pension schemes from the presence of a French state’s representative in the investment committee to the limitation of equity investments to 25% and the introduction of mutualised funds enabling the pension schemes to extend their equity allocation under draconian conditions.
The decree, which was challenged by the pension schemes in June 2016 then in March 2017, has been brought to the examination of the French Council of State last month by seven asset management companies that have been granted mandates by some pension schemes of “liberal professions”.
The French asset management representative body, the Association Française de la Gestion Financière (AFG), has been advocating for the amendment of the decree since the first draft of the text was released.
“AFG along with the AF2I (the French institutional investors association) has been pro-active on the matter as from the start but the previous government chose to rush the publication of the text during the electoral process,” says the newly elected chairman of AFG Eric Pinon (pictured) to InvestmentEurope.
Pinon adds that the investment firms that have lodged the appeal are rightly worried about some key provisions of the decree, that would make it very difficult for pension schemes to invest properly and for asset managers to serve them well.
However, he points out that the full decree should not be thrown to the bin.
“Only 10 to 15% of the decree should be reconsidered in our opinion. We had proposed amendments to the text which have not been taken into consideration. AFG has re-launched a working group on the matter to make concrete proposals and show our strong determination,” Pinon explains.
AFG’s deputy chief executive Eric Pagniez points out a lack of clarity in the decree that could put at risk asset managers.
“We need tools and rules that fit different types of market environment. We feel that the decree only suits a certain and surreal conjuncture, that is not in adequation with the current market situation. Fixed income securities, for instance, are clearly favoured even though rates have been dropping for over 20 years,” argues Pagniez.
“The message of French public authorities lacks of logic: they call for more investments of pension schemes into the so-called real economy but the text is completely the opposite of what should be done to achieve this goal,” he adds.
Pagniez quotes the concept of mutualised funds introduced by the text as another example of the decree’s blurry vision.
The pension schemes entering into the scope of the decree will only be able to invest in venture capital funds through the so called “mutualised funds” set by the text (10%).
Pagniez highlights that the core of mutualised funds has not been much detailed in the text.
“Two pension schemes and one third-party would have to team up for investments in these funds. The status of the third-party investor remains unknown. We do not know if this partnership will have to be permanent or if it applies only to the moment when the three parties will subscribe to the fund.
“Also are the percentages enshrined in the decree for investments in mutualised funds applying to only one of the parties or for all three parties? Nobody knows…”
Room for manoeuvre
At the French financial market regulator Autorité des Marchés Financiers (AMF), voices raise to say the text is not as constraining as described by the pension schemes concerned by the decree.
Speaking to InvestmentEurope, Xavier Parain, head of Asset Management Directorate at AMF, says that a component of AMF’s mission is to protect all type of investors, including the pension schemes of liberal works.
He recalls that the IGAS’ report has shed light on certain risky investments made by a few pension schemes by the past.
“The first part of the decree setting up a framework in terms of governance is not that much challenged contrary to the second part focusing on investment rules. It is not the role of the AMF to assess asset allocation rules that must be applied to pension schemes.
“Pension schemes may feel the decree will result in an almost plain fixed income allocation for them. Though there is room for manoeuvre regarding equity as well as illiquid investments. Real estate and private equity investments are not forbidden,” Parain underlines.
Nevertheless he acknowledges an important issue for the asset managers.
“One issue for the asset managers is that rather than building a dedicated fund for a pension scheme, they could build one for several of them but we do not have enough background to know if it is feasible or more complex than it seems to be,” Parain stresses.
Another observer close to the matter, who wishes to remain unnamed, suggests pension schemes should look at the economies achieved while investing in mutualised funds.
“If two pension schemes and a third-party decide to team up in order to invest in a fund, they are likely to get price deals with the asset manager” the expert says.