Ministers’ Deputies
CM Documents

CM(2009)69 29 April 20091
_________________________

1060 Meeting, 10 June 2009

11 Administration and Logistics

11.1 Pension Reserve Fund –
1st report for 2009 of the Management Board to the
Committee of Ministers

For consideration by the GR-PBA at its meeting on 28 May 2009
_________________________

1. In accordance with the Statute of the Pension Reserve Fund (PRF) (Resolution Res (2006)1, Article 6 2), the Management Board of the PRF reports to the Committee of Ministers at least twice annually. This note, which represents the first report for 2009, summarises the work carried out by the Management Board since the last report in November 2008 (CM(2008)148 corr), and presents the situation of the PRF as of 28 February 2009.

ACTIVITIES OF THE MANAGEMENT BOARD SINCE THE LAST REPORT TO THE COMMITTEE OF MINISTERS

2. The Management Board has held two meetings since November 2008: on 17 November 2008 and on 2 March 2009.

3. In November 2008, the Management Board took the following decisions:

    · The Board examined the convenience of using repurchase agreements (repos) for the management of the treasury and decided that, despite the higher security (due to the collateralisation) of repos compared to deposits, repos were not suitable for placing the treasury of the PRF. This was due to its relative low return compared to bank deposits and the scarcity of banks interested in doing repos with the Council of Europe in view of the small amounts involved and its intensive administrative procedures. Therefore, the treasury of the PRF continued to be placed in bank deposits, with a maturity not exceeding six months, in banks with an AA- minimum rating, and with an aim to diversify the placements between different banks.
    · Due to the crisis in the real estate markets, the Board decided to postpone the entry point of real estate investments until June 2009, when the decision will be reviewed. In the meantime the assets allocated to real estate were to be kept in bank deposits and the Board would follow the investment strategy of the selected fund manager and the evolution of the European real estate sector.
    · Due to the exceptional volatility and uncertainty in the markets where the PRF is invested, the Management Board decided that the portfolio should not be rebalanced and incoming net contributions should be kept in cash until the following meeting of 2 March 2009.

4. The Management Board has been kept informed by its Secretariat, at meetings and electronically, of the crisis and of the consequences of the financial scandals on the PRF. As regards Lehman Brothers, who filed for bankruptcy in September 2008, the mutual fund Pioneer Obbligazionario Etico – where the PRF invests its allocation to corporate bonds (16% of the portfolio) – held a 0.27% of its net asset value in bonds issued by Lehman Brothers. The asset manager liquidated this position in September 2008 and the impact to the performance was minimal, due to the large diversification of the fund. Further, the “Madoff scandal” and the “Stanford scandal” had no impact on the PRF through its investments with its asset managers (Pictet, Ideam, State Street Global Advisors and Pioneer).

5. At the Board meeting of 2 March 2009:

    · The two equity managers – Pictet and Ideam – made a presentation of their activity during 2008.
    · The Board was informed of the treasury management during 2008.
    · The Board noticed that the current interpretation by Ideam of the priority given to Human rights in the Socially Responsible Investment (SRI) policy of the PRF, lead to the exclusion of companies for reasons not directly related to the violation or the risk of violation of Human rights. The Board was in favour of allowing Ideam to continue their policy of giving priority to Human rights, which means excluding companies with a SRI score significantly lower than average in this respect, once their interpretation of the data provided by their external SRI analyst has been improved and after the inclusion of Vigeo and/or other SRI analysts’ criteria into their analysis of Human rights respect by Euro area companies.
    · The rules for the rebalancing2 of the portfolio and the investment of contributions were examined and the following decisions were taken:

    o Standard rules for rebalancing and investment of contributions:

    o In special circumstances, the Board could decide on one of the following options:

    o The Board decided, due to the exceptional period financial markets are going through, not to rebalance the portfolio for the time being. This decision would be reviewed at the following Board meeting. Regarding the investment of new contributions, it was decided that the contributions arrived by 27 of February (EUR 6.4 million) should be kept in cash and the contributions arriving from 27 February onwards should be invested following the standard rule for incoming contributions.

INVESTMENTS OF THE PRF

6. By 28 February 2009, the total assets of the PRF were valued at EUR 62 million and its composition was:

Asset class Investment Asset Manager Amount
(in million EUR)
% of total PRF
TOTAL EQUITY 22,563,229 36.34
  Mandate Pictet 11,169,734 17.99
  Mandate Ideam 11,393,496 18.35
TOTAL FIXED INCOME 24,914,232 40.12
  Mutual fund: SSgA EMU Government Bond Index Fund State Street Global Advisors (SSgA) 15,597,953 25.12
  Mutual fund: Pioneer Obbligazionario Euro Corporate Etico Pioneer 9,316,279 15.00
REAL ESTATE (not yet invested) Bank deposit Société Générale 3,653,530 5.88
Cash “long-term”(1) Current account / bank deposits Société Générale / Axa banque 6,419,979 10.34
Total long-term assets 57,550,971 92.68
Cash short-term (2) Current account / bank deposits Société Générale 4,537,000 7.32
TOTAL ASSETS 62,087,971 100

Source: Secretariat with Société Générale Securities Services’ data.
Note (1): Cash “ long-term” corresponds to the decision taken by the Management Board on 17 november 2008, to keep temporarily in cash contributions that should have been invested in accordance with the long-term investment strategy.
Note (2): Positions in PRF short-term cash are held to cover benefits payments and administration costs. They do not include accrued interests and transfers in transit due to closure time.

7. Without taking into account the short-term cash, that is, considering only the long-term investment portion of the PRF, the composition by 28 February was:

Asset class Investment Asset Manager % of long term portfolio
TOTAL EQUITY 39.21
  Mandate Pictet 49.50 (of total equity)
  Mandate Ideam 50.50 (of total equity)
TOTAL FIXED INCOME 43.29
  Mutual fund: SSgA EMU Government Bond Index State Street Global Advisors (SSgA) 62.61 (of total fixed income)
  Mutual fund: Pioneer Obbligazionario Euro Corporate Etico Pioneer 37.39 (of total fixed income)
REAL ESTATE
(not yet invested)
Current account Société Générale 6.35
Cash long-term Current account / deposits Société Générale / Axa Banque 11.15
TOTAL LONG-TERM ASSETS : EUR 57.55 million

Source: Secretariat with Société Générale Securities Services’ data.

8. By 28 February 2009, EUR 13.3 millions of 2009 contributions had been paid.

PERFORMANCE OF THE PRF

9. PRF long-term assets

The performance of the PRF long-term investment portion (excluding short-term cash) in 2008 and 2009 was the following:

In % 2008 2009 Since Inception
(Feb. 08)
Feb.
(1)
Mar Apr May June July
(2)
Aug Sep Oct Nov Dec Total
2008
Jan Feb YTD
2009
PRF -0.14 -1.89 2.85 0.33 -7.01 0.01 1.00 -6.27 -8.15 -1.22 0.78 -18.62 -4.12 -4.67 -8.60 -25.61
Benchmark
(3)
-0.47 -2.09 3.13 -0.26 -7.58 -0.20 1.09 -7.20 -9.86 -3.25 0.45 -24.02 -4.29 -6.39 -10.41 -31.93
Difference 0.33 0.20 -0.28 0.59 0.57 0.21 -0.09 0.93 1.71 2.03 0.33 5.40 0.17 1.72 1.81 6.31

Source: Euro VL
Note (1): Benchmark performance is for the whole month while the PRF performance starts on 6 February 2008.
Note (2): Performance figures from July onwards have been slightly modified by EuroVL, following the correction made on the performance of the real estate allocation.
Note (3): As defined in the PRF Investment guidelines: 55% MSCI EMU, 24% CitiGroup EMU Government Bond Index (CGEGBI), 16% IBOXX Euro Corporates 3-5 (bonds) and 5% Epra Nareit Europe.

10. The PRF outperformed its benchmark (in nominal terms) by 5.40% age points in 2008, as the result of the non invested real estate allocation and the good relative performance of the active managers (euro area equity and corporate bonds).

11. The Board has started looking into the consequences of the low performance in 2008 for the
long-term viability of the PRF, and the desirability of a review of the long-term strategic asset allocation.

12. For the record, as described in document [CM(2007)97], the current long-term asset allocation has been built with a modern portfolio theory model, with assumptions for assets returns based on historical records, and assuming a normal distribution of returns. The results of the model showed that the optimal portfolio should have, in the long term, and during the accumulation period, an average annual return of 5% in real terms, with a volatility of 14%, while in the depletion period (when the expenses are higher than the income), the expected return was 3.5% with a volatility of 8.5%. These outcomes, together with 2008 actuarial assumptions, implied that the PRF would have the following life cycle:

13. The optimal asset allocation is expected to deliver a long-term average annual real return of 5%, which means that bad years will be compensated for by good ones.

14. Incorporating the results of 2008 into the model could be done by considering that the -18.62% of 2008 performance is part of the results of a normal distribution of expected returns. For the first period, the distribution of the expected long-term return of the PRF has an average of 7% and the volatility is 14%; this means that there is a 2.5% probability that one year, the return be lower than -21% [= 7% - (2x14%)].

15. This would not preclude a possible revision of the assumptions of the model, which could lead to a review of the strategic asset allocation and the objectives of the investment policy. A review of the Investment guidelines of the PRF is planned, as stated in the Statute of the PRF, for 2010.

PRF Treasury3 (Short-term cash)

16. At the end of February, the Treasury was composed of a current account with EUR 200,000 remunerated at EONIA, and one bank deposit for a total of EUR 4.337 million. The performance of the PRF Treasury is presented in the following table:

  2008 2009
In % Jan Feb Mar April May June July Aug Sept Oct Nov Dec Jan Feb
Annualised monthly performance PRF short-term 4.05 4.21 4.25 4.46 4.46 4.56 4.78 4.84 4.69 4.97 4.68 4.65 4.39 4.69
Benchmark: EONIA 4.02 4.03 4.08 3.98 4.01 3.99 4.19 4.30 4.27 3.81 3.16 2.45 1.84 1.26
Difference 0.03 0.18 0.17 0.48 0.45 0.57 0.59 0.54 0.42 1.16 1.52 2.20 2.55 3.43

Source: Secretariat
Note: The reference benchmark for the short-term investment is the EONIA (average rate over the month)

17. The average performance of the PRF treasury in 2008 was 4.55%, which compares favorably with the 2008 average of 2.7% by money market funds in the Morningstar category “Money market Euro-stable”.

Performance by asset class

18. The performance of the equity part for 2008 was -35.19%, while the Year to Date performance for 2009 is -17.63%.

In % 2008 2009 Since Incep.
(Feb. 08)
Feb
(1)
Mar Apr May June July Aug Sep Oct Nov Dec Total
2008
Jan Feb YTD
2009
PRF TOTAL EQUITY -0.55 -2.78 5.36 1.31 -11.80 -1.21 1.11 -11.18 -16.00 -5.39 0.98 -35.19 -7.52 -10.93 -17.63 -46.62
Benchmark
MSCI EMU
-1.15 -2.66 6.05 0.91 -11.70 -1.52 1.21 -11.36 -15.75 -6.62 0.21 -36.67 -6.79 -10.89 -16.94 -47.40

Source: Euro VL.
Note (1): Benchmark performance is for the whole month while the PRF performance starts on 6 February 2008.

19. The performance of the fixed income portion of the PRF was 1.31% in 2008. The accumulated performance for 2009 is -2.15%.

In %   2009 Since
Incep.
(Feb. 08)
Feb
(1)
Mar Apr May June July Aug Sep Oct Nov Dec Total
2008
Jan Feb YTD 2009
PRF TOTAL FIXED INCOME 0.35 -0.95 -0.18 -1.07 -1.03 1.52 0.94 -0.96 -0.44 2.53 0.66 1.31 -1.71 -0.45 -2.15 -0.87
Fixed income benchmark (2) 0.28 -1.14 -0.28 -1.27 -1.28 1.56 0.89 -1.50 -0.28 2.83 1.09 0.81 -0.68 0.07 -0.61 0.19

Source: Euro VL and the Secretariat (for February performance of total fixed income)
Note (1): Benchmark performance is for the whole month while the PRF performance starts on 6 February 2008.
Note (2): As defined in the PRF Investment guidelines: 60% Citigroup EMU Government Bond Index (CGEGBI) and 40% Iboxx Euro Corporates 3-5.

20. The real estate allocation has been placed in a current account and a bank deposit ahead of the investment pending the decision of the entry point.

In % 2008 2009 Since Inception
(Feb. 08)
Feb Mar April May Jun July (1) Aug Sep Oct Nov Dec Total
2008
Jan Feb YTD 2009  
PRF REAL ESTATE
(not yet invested)
0.32 0.26 0.26 0.36 0.37 0.40 0.40 0.43 0.42 0.36 0.39 4.04 0.33 0.29 0.62 4.69

Source: EuroVL
Note (1): Performance figures from July onwards have been modified by EuroVL.

21. For information, the real estate benchmark of the PRF, the Epra Nareit Europe, has suffered a loss of –57.62% since the inception of the PRF.

Analysis of the equity4 portfolio from the point of view of Socially Responsible Investments (for 2008)

22. For the record, the equity portfolios are being managed taken into account financial as well as Socially Responsible Investments (SRI) factors. The SRI policy of the PRF for equities, as approved by the Committee of Ministers in July 2007 (CM(2007)97), consists of selecting companies with the best socially responsible behaviour within a given sector. Social responsibility of companies is measured in terms of respect of the environment, social policy and corporate governance.

23. Companies whose business involves alcohol, tobacco, weapons production and trade, pornography and gambling are excluded since they are considered to be harmful for the Human dignity or health. These criteria lead to the following exclusions:

Note Company
Note Sector
Note Country
Note Excluded by
Note Reason
Note Greek Organ. Football Prognostics
Note Consumer discretionary
Note Greece
Note Ideam / Pictet
Note Gambling
Note Lottomatica
Note Consumer discretionary
Note Italy
Note Ideam / Pictet
Note Gambling
Note Inbev
Note Consumer goods
Note Belgium
Note Ideam / Pictet
Note Alcohol
Note European Aeronautic Defence Space
Note Industry
Note Europe
Note Ideam / Pictet
Note Nuclear weapons
Note Indra Sistemas
Note Information technology
Note Spain
Note Ideam / Pictet
Note Nuclear weapons
Note Jeronimo martins SGPS
Note Consumer goods
Note Portugal
Note Pictet
Note Alcohol
Note Heineken
Note Consumer goods
Note Netherlands
Note Ideam / Pictet
Note Alcohol
Note Safran
Note Industry
Note France
Note Ideam / Pictet
Note Nuclear weapons
Note Pernod-Ricard
Note Distillers & Vintners
Note France
Note Ideam / Pictet
Note Alcohol
Note LVMH Moet Hennessy Louis Vuitton
Note Consumer discretionary
Note France
Note Ideam / Pictet
Note Alcohol
Note Alcatel-Lucent
Note Information technology
Note France
Note Pictet
Note Military contracts
Note Finnmeccanica – Post Raggruppamento
Note Industry
Note Italy
Note Ideam / Pictet
Note Nuclear weapons
Note Lagardere SCA
Note Consumer discretionary
Note France
Note Pictet
Note Military contracts
Note Thales
Note Aerospace & Defense
Note France
Note Ideam
Note Weapons
Note Rheinmetall
Note Industrial Conglomerates
Note Germany
Note Ideam
Note Weapons
Note Dior
Note Apparel Accessories & Luxury Goods
Note France
Note Ideam
Note Alcohol

24. Following its interpretation (see paragraph 5), Ideam had concerns related to the respect of Human rights with respect to Anglo Irish Bank, Raffeissen and Grupo Prisa, and excluded these companies from the portfolio.

25. Both asset managers agree that, during 2008, the SRI feature of the portfolio contributed negatively to the performance (relative to the benchmark), while their financial decisions lead to over performances.

RESOLUTION

26. In light of the preceding, the Management Board of the PRF invites the Committee of Ministers, in accordance with the provisions of Resolution Res(2006)1 on the Statute of the Pension Reserve Fund; to take note of the information presented in this document.

Note 1 This document has been classified restricted until examination by the Committee of Ministers.
Note 2 Rebalancing in this context means to sell and buy assets affected by (dissimilar) natural market movements, in order to follow the PRF long-term asset allocation.
Note 3 PRF Treasury corresponds to the PRF liquidities earmarked to pay benefits and administration costs.
Note 4 The other asset class managed with SRI criteria is corporate bonds whose manager does not report on SRI factors. The Secretariat of the Management Board is working to improve this aspect.


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