Can you tell us about the ERAFP?
Philippe Desfossés : The ERAFP manages the additional pension plan of public service (RAFP). This is a compulsory pension scheme, funded, established for the benefit of state officials (civilian and military), local authorities, hospitals and magistrates. Established in 2005, RAFP allows payment in addition to the main board of an additional benefit. The ERAFP is now one of the largest public pension funds in the world in terms of affiliates with approximately 4.6 million beneficiaries contributors, 41,000 contributing employers and nearly 1.7 billion Euros in contributions collected annually.
The RAFP is subject to stringent prudential regulation which provides that:
the plan’s obligations with respect to its beneficiaries must be covered by assets of an amount at least equal, knowing that to date the hedging ratio is approximately 112%,
the expected present value of these commitments must be calculated using, in a cautious approach, a low discount rate (1.7% in 2011) determined annually by the Board of ERAFP.
It is important to note that the investment horizon of the ERAFP is part of a long-term perspective and not in a logic of maximizing return on investment. The scalability of the Plan assures indeed positive cash flow (1.7 billion Euros per year) over a long period, which allows to carry the assets in the portfolio without having to sell them to pay benefits .
Thus, rather than exclude polluting sectors such as steel and energy, which we must admit that we will need much longer, this approach helps to promote the most responsible companies in these sectors.
Philippe Desfossés
Why did you choose a 100% SRI investment policy?
The investment policy initiated by the Board of ERAFP has aimed, since 2005, to reconcile in a single approach financial performance, risk management and socially responsible commitment. The choice of a "100% SRI" is at the heart of policy and investment process ERAFP, who intended to apply to all classes of assets and all assets.
In 2006, a Charter on the SRI was adopted because "the Board (of ERAFP) believes that investments made under the sole criterion of financial performance ignore the social, economic and environmental consequences. Conversely, by investing on the basis of the values he learned (....), the Council intends to develop both activities, businesses, public bodies and states which are in compliance with this standard of values and weigh in advance for consideration.
This Charter defines five domains of value (rule of law and human rights, Social Progress, Social Democracy, Environment, Good governance and transparency) and 3 exclusion criteria in principle (Torture-Death Penalty - Child soldiers) to establish a baseline for each class of issuer (stocks or bonds) built using social rating agencies (ie, Vigeo) to allow filtering of the investment universe.
How does your SRI approach apart from the competition? Can you talk specifically about your Best In Class approach?
Our Charter has adopted a Best-In-Class approach, that is encouraging the best investments from the SRI perspective, which has two advantages: the absence of sectorial bias and investment in all sectors. The aim is to encourage each issuer to progress. This pragmatic and dynamic approach assumes that we must take the world as it is by accepting that he cannot be changed overnight, but with the ambition to advance the values of our SRI Charter in each sector.
This means:
encourage the most responsible issuers among a comparable group of actors (in terms of size, sector and geographic area),
promote progress by granting subsidies to issuers having progressed
Thus, rather than exclude polluting sectors such as steel and energy (which we must admit that we will need much longer), this approach helps to promote the most responsible companies in these sectors.
Philippe Desfossés
Can you tell us more about your partnership with EDHEC about your socially responsible index? What is the originality of this approach?
With 100% of SRI investments, ERAFP positions itself at the forefront of French SRI investors. As such, we are engaged in initiatives to promote dialogue between investors and research in SRI. Our partnership with EDHEC fits into this logic. Thus since 2009, we worked closely together to establish an equity index SRI Best In Class (“FTSE EDHEC-Risk Efficient ERAFP SRI Index”). The originality of this index is to select components based on their risk / return and not by market capitalization, the idea being to give more weight to securities contributing positively to the Sharpe ratio index.
IShares launched two ETFs on the theme of sustainable development (iShares Dow Jones Global Sustainability Screened and iShares Dow Jones Europe Sustainability Screened). Does this type of ETF is likely to meet your needs?
Ideally, these two ETFs could meet our needs. However, we prefer to build our own methods of selection through a tailor made approach.
Philippe Desfossés
What is your asset allocation policy and risk management? Does Your approach automatically excludes all alternative investments (hedge funds, insurance-linked products, private equity, real estate)?
Our asset management policy is prudent and secure. Under our current regulatory constraints, ERAFP invests at least 65% in bonds (sovereign, businesses, local governments and supranational organizations), up to 25% in diversified assets (stocks) and up to 10% in real estate. Minimum 90% of our assets must be denominated in Euros. It is important to note that we only manage live the bond portion of our portfolio, the rest being delegated to external management companies, especially our shares portfolio.
At December 31, 2011, the asset allocation was as follows:
Bonds : 76,6%
Shares : 19,3%
Liquid assets : 4,1%
On alternative investments as you mention, for the time we made the decision to invest in real estate. That is why we are launching a consultation with investment firms for the award of two terms of management mandate in this area: a group of unlisted real estate assets located in France and a group of unlisted real estate assets located in Europe, both, consistent with the choice of t 100% SRI investment. Our investment strategy is based primarily on investing in real estate assets to generate a stable rental yield but will also lead managers to invest in distressed assets to improve their SRI performance.
What are your performance since your inception in 2005?
Since its inception in 2005, the technical performance of the RAFP is 4.075% at 31-12-2011
