– France Seizes €36bn of pension assets (Financial News, Nov. 29, 2011):
Asset managers will have the chance to get billions of euros in mandates in the next few months for the €36bn Fonds de Réserve pour les Retraites (FRR), the French reserve pension fund, after the French parliament last week passed a law to use its assets to pay off the debts of France’s welfare system.
The assets have been transferred into the state’s social debt sinking fund Cades. The FRR will continue to control the assets, but as a third-party manager on behalf of Cades.
The change is included in the annual social security law that was adopted last week and will be published by the end of December after anticipated approval by the constitutional court.
The move reflects a willingness by governments to use long-term assets to fill short-term deficits, including Ireland’s announcement last week that it would use the country’s €24bn National Pensions Reserve Fund “to support the exchequer’s funding programme” and Hungary’s bid to claw $15bn of private pension funds back to the state system.
The decision has prompted a radical restructuring of the FRR’s investments. The new strategic investment plan, which will be released in the new year, will see a rapid reduction in its 40% allocation to equities and a shift to cash and short-term government bonds, according to a source close to the situation.
There will be a focus on liability-driven investment, where asset managers are told to minimise risk by matching assets closely to liabilities.
The transfer of the FRR’s assets to Cades is controversial. Force Ouvrière, a trade union confederation, accused the government of “provoking the clinical death” of the FRR.
The decision was taken within the context of this year’s pension reform, which provoked riots with its decision to raise the retirement age. The state old-age pension system, the Cnav, is in deficit, and responsibility for financing the deficit rests with Cades.
The government is requiring the FRR to pay €2.1bn a year to Cades to meet this obligation.
The government claims that the rise in retirement age will return Cnav to balance by 2018, so the FRR is expected to pay this sum for the next eight years. The FRR will then be wound down. It is expected to cease operations by 2024.
The schedule of payments will account for about two-thirds of the FRR’s assets. A source close to the situation said: “That means it will keep about one-third of the total without any liability constraint, and will have the opportunity to manage that part of the fund in a normal active and long-term way.”
Another source said: “In most years, the FRR accounts for more than 50% of asset management mandates in France.”
He said the FRR had been an innovative force in the relatively conservative French asset management world. It had pioneered a shift in the style of managing money in France, from balanced mandates, where a single fund manager invested its client’s money in many different asset classes, to specialist mandates, involving many fund managers focusing on particular areas of expertise.
The FRR promoted socially responsible investment, increased the use of investment consultants and encouraged objectivity in assessing performance.
The source added that without the FRR, “the risk is that the market will slip back into its old habits and slower pace”.
An asset manager said: “Clearly, the move creates new opportunities, because the French asset management market will be reshuffled because of the changes.
But it is also a step back because there are very few French capitalised pension schemes, and the experience around the FRR, the richness of the asset management and the opportunities it created will disappear in a few years.”