For the FRR, the worst-case scenario is a signif- icant increase in liabilities, because liabilities are under-hedged (90% at the end of 2016). If liabilities were to increase by 7%, the assets would increase by only 90% of the increase in liabilities (by amount). However, this disaster scenario would be particularly critical for inter- est rates, as it implies that the French yield curve will become very negative for all maturi- ties (-1%).

Second objective: creating significant value

While ensuring that it is in a position to service its liabilities, the FRR endeavours to maximise performance. It invests in particular in equities and high yield bonds, such as emerging market bonds, corporate bonds and loans to the econ- omy. As the amount invested in hedging assets corresponds to only 90% of liabilities, the FRR can invest more in performance assets.

The FRR is thus expected to deliver a perfor- mance in excess of the cost of the French debt, thereby representing a substantial source of value creation. Since the pensions reform in 2010, the FRR has created value of EUR 8.8 bil- lion. We estimate that, at the end of 2016, one euro invested in the FRR will create 25 cents of present-day value for the State, on a like-for- like allocation basis5 and 2024 horizon.

Furthermore, every additional contribution can create up to 39 cents of value per euro as: this euro is then invested in the FRR, implicitly replacing an investment in French debt, and creating 16 cents of value per euro;

each additional euro increases the FRR s sur- plus and therefore its safety margin. The FRR can then invest more in performance assets, raising the expected performance of assets already under management, and creating 26 cents of value per euro.

Conversely, each withdrawal destroys 39 cents of value per euro, by leading the FRR to secure the allocation further.

5 Calculated as the additional projected amount in 2024 thanks to the contribution of this euro, discounted at OAT rates in 2016.

THE FRR S PORTFOLIO With the exception of the management of opera- tional cash requirements, all of the FRR s invest- ments are made through investment service providers. To do this, the FRR may either use management mandates awarded through ten- der processes, or invest directly in investment UCIs6. Alongside traditional management, the FRR has appointed two managers to follow an overlay management approach. This type of management allows the FRR to hedge its cur- rency risk and tactically adjust its asset alloca- tion without getting involved in the management of the selected managers portfolios.

The FRR is exposed to certain asset classes through UCIs managed in a predominantly active manner. These are investments made in emerging market debt, emerging market equi- ties, high yield corporate bonds, loans to the economy, and money market instruments.

Composition of the FRR s portfolio

In 2016, there were no major changes to the portfolio s composition relative to 2015. Perfor- mance assets weighting in the strategic alloca- tion for 2016, when established, stayed more or less the same as it was in 2015 (50%).

At 31 December 2016, the FRR s portfolio comprised: performance assets accounting for 51.1% of the FRR s net assets, versus 48.9% at the end of 2015; and

hedging assets accounting for 48.9% of the FRR s net assets, versus 51.1% at the end of 2015. Matched assets accounted for 44% of the hedging assets and are held to maturity.

6 UCIs: Undertakings for Collective Investment.