The pensions reforms introduced in 2010 have significantly changed the FRR’s investment objectives. Compared to previous liability assumptions, the FRR’s investment horizon is shorter whilst remaining sufficiently long to permit a significant level of exposure to performance assets: up until 2010, the FRR was working on the assumption of 21 payouts between 2020 and 2040. After the reform, the FRR has to pay 2.1 bn€ to CADES each year between 2011 and 2024 (inclusive) and a single payment to CNAV in respect of the CNIEG contribution in 2020. Moreover, the annual endowments received until now by the FRR are henceforth directly allocated to CADES.
Given its objectives, its investment horizon and risk aversion level, the FRR decided, following its Supervisory Board meeting of 13 December 2010, to adopt the following allocation, comprising two compartments:
The hedging component guarantees that the FRR is able to pay its annual commitments that are recorded as liabilities. To do so, even in a very low interest rate environment, it must represent a substantial proportion of liabilities. The FRR sets itself a hedging rate of at least 80%. The hedging component comprises very low credit risk fixed income instruments: On the one hand, a large share of French Treasury Bonds (OAT) held until maturity delivering an income stream, in proportion to the amount of the FRR’s liabilities, as well as investment grade corporate bonds (rated at least BBB-).
The performance component delivers an additional return thanks to its dynamic and diversified assets. It must also be able to top up the amounts generated by the hedging component to cover the annual liabilities, even in the event of a very unfavorable asset scenario. This is why the FRR ensures that, even during periods of extreme stress (affecting the performance assets, the credit risk of the hedging component or the interest rate risk incurred by under-hedging the liabilities), the funding ratio is always greater than 100%. The performance component is currently composed of emerging and developed country equities, high yield corporate bonds and emerging market bonds. Around one third of its allocation consists of exposure to emerging markets: via government bonds and equities and via ADECE (Developed country equities exposed to growth in the emerging economies) mandates. Almost half of the exposure to developed countries consists of Eurozone corporate securities