New framework for French pension funds proposed

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The French government is rewriting a decree amending the financial management of local pension funds after its first version unveiled in June was challenged.

Reforming the financial management of French pension funds is a hot topic. Proposed amendments to existing law aim to bring a harmonised and stricter framework to the organisation of all French pension funds and their investments.

However, the first version of the relevant legal text, presented to representatives of various French pension funds on 24 June this year, has sparked strong reactions.

In response, the ministry of Social Affairs, working on the reform with the ministry of Finance, has announced that a new text is currently being prepared for submission to pension funds for further discussion around political and technical issues.

The reform project is based on a report published in 2013 by the General Inspectorate of Social Affairs (IGAS), which assessed management practices of a number of French pension funds.

The subsequent proposed reforms target, among other points, the role of pension funds’ administration boards and third parties, the implementation of ethics rules, as well as clarity of investment rules.

Unpleasant surprise
The Pensions and Solidarity division of French state-owned financial group Caisse des Dépôts manages 48 funds, including the “pay as you go” scheme of Ircantec, the complementary regime for contractual staff in the French public sectors – which has AUM totalling €9.5bn.

Bringing Ircantec into the scope of the reform has been an unpleasant surprise for the institution, which in August asked for the immediate withdrawal of the text in its original form.

For Vincent Delsart (pictured), chief investment officer at Caisse des Dépôts’ Pensions division, Ircantec should not be in the scope of the reform since the IGAS report was positive towards its management, and because Ircantec’s own policy is already agreed by the French state.

“Ircantec has been cast among other pension schemes even though the IGAS report considered we were doing good stuff. The decree did not take into account the fact that the Caisse des Dépôts manages Ircantec’s portfolio.

“I believe that the CDC is competent enough to provide support to Ircantec with the understanding of the complexity of non-listed investments,” he says.

Delsart explains the decree would have constrained Ircantec’s investment capabilities in terms of assets, products and geographic areas.

“Through that decree, the ministry of Social Affairs wanted pension schemes to have around 95% of their investments focusing on the European Union. Also the equity exposure would have been limited to 25%. Our current allocation to equity strategies reaches 36%.”

Delsart adds Ircantec would have been limited in its non-listed investments that gathered infrastructure funds, private equity funds financing French SMES, or strategies backing the energy transition.

“By binding Ircantec’s investment capabilities, the first version of the decree would have constrained the potential yield and raised the volatility of its portfolio,” he claims.

Too strict?
A number of actors including the chairman of the French Institutional Investors Association (AF2I) Jean Eyraud have also denounced a framework that is too strict and tight on the investment side.

The initial text proposed two schemes. One did not require the implementation of risk monitoring procedures on the condition of only investing in bonds.

Pension funds were not restricted in their investments in the second scheme, but were asked to implement continuous risk monitoring.

“In the name of better risk management of pension schemes, the first version of the decree favoured an allocation that perhaps made sense four years ago. But allocating most assets to European sovereign and government bonds does not take into account the risk profile of such investments in the current low-rate environment,” Delsart says.

“The French state pushes institutional investors to be ever more involved in the real economy and to strengthen their efforts on impact investing. With such a decree, we have the feeling that this move might stop,” he adds.

Another measure set in the first version of the text has also encountered considerable skepticism from a number of French pension funds. It suggested pairing French pension funds and insurers for the launch of mutual funds.

But according to various institutional players, insurers are no more convinced by the measure.

Delsart hopes the new version of the text, in the event it would be applied to Ircantec, will allow more flexibility in its investment capabilities.

“As the process might be long, we cannot wait for the implementation of that decree to work on our asset allocation,” Delsart says.

This article is a longer version of the feature published in the November 2016 issue of InvestmentEurope.

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