EPI Summit 2012 1 Sustainable growth / intergenerational fairness / Responsible investment 09/05/2012 www.rafp.fr Embracing an enduring investment approach to thrive in the long term Sustainable growth / intergenerational fairness / Responsible investment
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Embracing an Enduring Investment Approach to Thrive in the Long Term - Presentation by Philippe Desfossés at the European Pensions & Investments Summit
Philippe Desfossés delivered his presentation titled "Embracing an Enduring Investment Approach to Thrive in the Long Term" at the European Pensions & Investments Summit 2012.
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Assuming an observed life expectancy of 25 years (after people have retired at 62), how can we call a retirement scheme, in which, to recoup your contributions, it takes :
� 40 years, or for an opposite situation
� 10 years.
If implicit life expectancy is lower than « observed » life expectancy, what can we conclude?
Why is sustainability so at the core of all the big issues we have to address
For a retirement scheme, « sustainability » means not to distribute benefits that are paid by the « sacrifice » of the young contributors.
"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs » . (Bruntland report 1987)
What happens if the actual rate of What happens if the actual rate of return is much lower than the discount return is much lower than the discount raterate
€ 484
Investment return
rate : 3,5% € 684
If the actual return is 3,5% (vs. an expected return of
7%),
���� I am short by 200
Can you be responsible when you overestimate expected returns?
Public Pension Funds (USA and UK)Public Pension Funds (USA and UK)
Market Crash + Irrealistic assumptions = next bail out ?Market Crash + Irrealistic assumptions = next bail out ?
California Public Employees’ Retirement System, California Public Employees’ Retirement System,
•• expected rate of return of expected rate of return of 7.75 percent*7.75 percent* for the past nine years, and for the past nine years, and
8 percent before that, 8 percent before that, * It has just been reduced to ….7,50%* It has just been reduced to ….7,50%
•• annual return during the decade from Dec. 31, 1998, to Dec. 31, annual return during the decade from Dec. 31, 1998, to Dec. 31,
•• annual return during the decade from Dec. 31, 1998, to Dec. 31, annual return during the decade from Dec. 31, 1998, to Dec. 31,
2008, has been 2008, has been 3.32 percent3.32 percent, and last year, when markets tanked, it , and last year, when markets tanked, it
lost 27 percentlost 27 percent ((http://weblog.signonsandiego.com/weblogs/afb/archives/031711.htmlhttp://weblog.signonsandiego.com/weblogs/afb/archives/031711.html.).)••
Is the solution to add more risk?Is the solution to add more risk?
Discounting liabilities at too high a rateDiscounting liabilities at too high a rate
�� No choice but search for high yield No choice but search for high yield
��High yield means high risksHigh yield means high risks
At the end overoptimistic expected return may lead to lower rates of return.At the end overoptimistic expected return may lead to lower rates of return.
CalPERS, however, believes they will be able to CalPERS, however, believes they will be able to mitigate this cost increase through continued mitigate this cost increase through continued excess returns of the CalPERS fund. excess returns of the CalPERS fund.
From the cotisations to the pensions How are benefits calculated?
� The amount of the annual pension payment is calculated by multiplying the number of points acquired by the service value, which is also set annually.
� Payments may only start after the age of 60*.
� The entitlement is paid out in annuities, unless the number of points acquired is too low .
200820072005 20092006Year 2010
* The minimum retirement age has been reviewed. The age at which it will be possible to retire –
with a discount – will increase to 62 years by 2018
A technical yield just above 4% is consistent with an observed life
expectancy of 25 years
€0.04219
2008
€0.04153
2007
€0.04
2005
€0.04261€0.0408Service value
20092006Year
+1.80%+2.00% +1.60% +1%
2010
€0.04283
+0,5%
The founders of the Scheme defined a deliberately prudent pricing
� The “pricing” rate is prudent� 1.34% (management fees included) � 1.04% (ex management fees)
� As the ECB aims at inflation rates of below, but close to 2% over the medium term and taking into account a political « committment » to maintain the purchasing power of the retirement pensions� The pricing rate in nominal terms equals 3,34%
� This rate � Has sometimes been criticized for being “too” conservative� Nows it appears just prudent
� Nominal rates in some countries are at historical lows� Greek default questions the very notion of a “riskless” asset
� The return from the ERAFP portfolio has to be significantly higher than the pricing rate, since: To be funded is not enough Some reserves have to be booked (morbidity tables drift, external shock, operational
risk) An extra reserve to fund revalorisation of benefits.
€1,000
€ 635
Why can we say we invest soundly :
• our reserves are « ironclad » reserves have been calculated last year using a discount rate that can be qualified as prudent : 1,7% (3,7% with a core inflation of 2% per year);
• our funding ratio is still high, since it remains close to 110 %, although all the capital losses on the stock portfolio have been taken into account, the impact of the Greek default has been booked;
• our SRI policy is consistent with the way we manage the liabilities side of our balance
• our SRI policy is consistent with the way we manage the liabilities side of our balance sheet. As we invest for the very long term, sustainability is important.
12,5% 26,1%22,6%19,2%15,8%9,2%6,0%2,9%0,01%
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
1,4% 1,5% 1,6% 1,7% 1,8% 1,9% 2,0% 2,1% 2,2%
1 ,2 0 %
PNT au 31/12/2008PT au 31/12/2008
Provision technique et provision non technique au 31/12/2008 (évaluations)
Increased diversification of credit and international equities
of which convertible bonds 1,5%
International equities 21,0%
Multi asset 1%
Real estate 1%
For the RAFP it was clear from the very beginning that SRI was consistent with its mission
RAFP puts intergenerational equity at the core of its governance.
The same point is used� To buy rights to a future benefit, when you’re working� To pay the benefits to the retirees.
The RAFP wants its investments to contribute to better the future not to increase “our immediate wealth” at the expenses of our children and great children.
Combination of• very prudent monitoring of the scheme (low discount rate) • the will to have some bearing on the economy in order
• to contribute to a change in the way we produce and • make possible to preserve our common wealth : the Earth
� Decision to adopt a global but not a radical SRI policy
What is at stake? Changing our investment process?
A new world is coming A new world is coming What are the issues that no one should ignore?What are the issues that no one should ignore?•• we are discovering that scarcity will very directly impact our liveswe are discovering that scarcity will very directly impact our lives•• externalities will be more and more internalized.externalities will be more and more internalized.
Can SRI remain?Can SRI remain?•• an overlay an overlay •• something that concerns just a marginal part of your assets or your fundssomething that concerns just a marginal part of your assets or your funds
When an investor says he is doing some investment in SRI When an investor says he is doing some investment in SRI
When an investor says he is doing some investment in SRI When an investor says he is doing some investment in SRI �� what does it tell about the rest of its investment?what does it tell about the rest of its investment?
Why is it so difficult to change?Why is it so difficult to change? Because most of our decisions do not take into account the long term,Because most of our decisions do not take into account the long term, Because turkeys don’t vote for Chrismas.Because turkeys don’t vote for Chrismas.
«« while the financial services industry performs many economically vital functions, and will continue to play while the financial services industry performs many economically vital functions, and will continue to play a large and important role in London’s economy, some financial activities which proliferated over the last ten years were a large and important role in London’s economy, some financial activities which proliferated over the last ten years were
‘socially useless’, and some parts of the system were swollen beyond their optimal size‘socially useless’, and some parts of the system were swollen beyond their optimal size ».». Lord TurnerLord Turner
«« In recent years, banks have chased shortIn recent years, banks have chased short--term profits by introducing complex products of no real use to term profits by introducing complex products of no real use to
humanity’, and some parts of our industry have become overblownhumanity’, and some parts of our industry have become overblown »» Stephen Green, Chairman of the BBAStephen Green, Chairman of the BBA
A global and integrated SRI policy...
� From inception in 2005, the Board of Trustees decided to implement a comprehensive SRI policy :
� Which covers all asset classes and all assets
� SRI is not just a small pocket in our assets
� SRI is not just an investment strategy amongst others it is our investment strategy
� Which applies a range of ESG criteria transversally
� We believe this is more coherent than the addition of a lot of different theme funds
� investing in a renewable energy fund if the rest of your equity portfolio is overweight in oil companies ?
� attacking a company for its collaboration with an authoritarian regime, if you buy the bonds of this regime ?
� excluding a polluting industry, if all the other companies you invest in rely on this industry ?
� We apply a best-in-class policy to all asset classes
� We aim to make everyone have a motivation to make progress
Best in class : the best way to be pragmatic and adapt to asset class features ?
What would be the sense of investing just a fraction according to SRI principles ? What would it tell of the rest of the investment ? � Best in Class make sense
What does ERAFP promote?
• a global but also a pragmatic approach - no sector bias (we’ll need oil for a while),
• joining forces by exchanging so we can more efficiently engage,
• convincing asset managers that they should integrate SRI analysis in their investment process,
• developing indexes so other long term investors can indexes so other long term investors can start investing in best in class SRI. start investing in best in class SRI.
Some asset classes have specific features
• high unitary amount of the investment means interest to pool together (infrastructure or RE),
• investment has to be assessed in its environment (for real estate connection to urban transport)
A transversal approach : engagement
As Robert Urwin stressed investors responsibility: they should act like conscious « universal owners »
For too long a time :For too long a time :
•• institutional investors have been institutional investors have been consenting victimsconsenting victims•• asset owners rights have not been asset owners rights have not been
•• asset owners rights have not been asset owners rights have not been protected as they should haveprotected as they should have•• fidiciary duty did not extend to fidiciary duty did not extend to shareholders’ rights protectionshareholders’ rights protection
«« Times there are a changingTimes there are a changing » :» :•• institutional investors talk to each institutional investors talk to each otherother•• asset owners want their rights to be asset owners want their rights to be taken care oftaken care of•• fidiciary duty evolvesfidiciary duty evolves•• as a fallout of the crisis authorities as a fallout of the crisis authorities are pushing for a changeare pushing for a change
The UK Stewardship Code produced by the FinancialReporting Council sets out good practice on the engagement of institutional investors with companies�7 principles
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