Equities allocations have been slashed as a result of government changes to the liabilities of the Fonds de Reserve pour les Retraites (FFR) which prompted changes to the fund’s investment policy.
The new portfolio, approved in December 2010, more than halved the allocation to equities from 45 per cent to 21 per cent. It substantially increased allocations to bonds from 45 per cent to 73.9 per cent while commodities and real estate were both decreased from 5 per cent to 3.5 per cent and 1.8 per cent respectively.
This new portfolio was adopted in the belief that it would satisfy FRR’s liabilities which now entail 14 annual payments of €2.1 billion ($2.9 billion) to the Caisee d’Amotissement de la Dette Sociale (national social debt amortisation fund – CADES).
The fund – which totalled $51.6 billion at the end of last year – was created to meet the challenges of funding the mandatory retirement PAYGO plans.
As well as meeting the FRR’s liabilities, the changes to the strategic allocation are expected to provide an expected annualised return of 6 per cent, a decrease from the expected 6.3 per cent outlined in the 2009 policy.
It will be seen this year if the FRR is successful in its purpose of propping the French pension system up, with its annual payments to CADES commencing. The payments must be made each year by October until 2018, as outlined by a government set timetable, and will help CADES finance the deficits of the bodies which run the basic old age pension.
The breakdown of the new portfolio is as follows:
– Commodities: 3.5 per cent
– Real estate: 1.8 per cent
– Emerging countries debt: 5.3 per cent
– High yield debt: 3.5 per cent
– Equities (including private equity): 21.0 per cent
– Corporate bonds (Inv. Grade): 16.3 per cent
– OECD Sovereign Bonds: 16.3 per cent
– Cashflow-matched French Treasury Bonds (OAT): 32.5 per cent