French Fund Implements New Asset Allocation With LDI Focus

(March 11, 2011) — The $51 billion Fonds de reserve pour les Retraites (FRR) has implemented a new asset allocation using a liability-driven investment (LDI) strategy in order to meet its obligation to pay nearly $3 billion each year to the Caisse d’Amortissement de la Dette Sociale (CADES) until 2024, when the fund will close down.

According to the pension reserve fund, it adopted a plan on December 13 to help it meet its liabilities while maximizing portfolio returns through 2024. In order to secure the new liabilities to CADES, FRR will maintain a hedging portfolio of bonds, initially hedging 85% of the cash flows, but potentially increasing in the future via an opportunistic de-risking program, IPE reported.

The pension also said it plans to search for new managers to head  socially responsible equities, commodities, high-yield debt and developed country equities with exposure to emerging markets, we will mechanically move towards more diversified assets which represent the whole world and less centered on the euro zone,” chief investment officer Philippe Aurain said at an FRR press conference in Paris, according to the Wall Street Journal.

The FRR, whose assets totaled $51 billion as of December 31, 2010, splits its assets into two groups: 38.8% performance assets and 61.2% liability hedging assets. Performance assets represented 38.8% of net assets (which consists of 32.3% equities, 3.2% commodities, 2.1% real estate and 1.2% emerging markets debts), while liability hedging assets accounted for 61.2% of net assets. Furthermore, the fund said it returned 4.2% in 2010, and is up 3% since inception in June 2004.

Other funds have been implementing LDI strategies to cope with shortfalls. According to a MetLife report, underfunded liabilities are the most important risk facing US corporate defined benefit plans. “With the top two risk factors on the liability side of the asset-liability equation, followed by two asset-oriented factors, we believe the asset-centric focus on investment returns that characterized the inaugural study in 2009 has given way to one that suggests that there is a growing interest on the part of plan sponsors to manage plan assets in the context of plan liabilities,” Cynthia Mallett, vice president in MetLife’s product and market strategies unit, said in a news release about the study.

According to MetLife’s 2011 US Pension Risk Behavior Index survey, 60% of the times they were asked, respondents said asset and liability mismatching was their most important risk factor, while 45% of the times they were asked, asset allocation was the biggest risk factor.