The Governing Board (at 31 December 2004)

Chairman's Group

Members

The graph below shows membership as at 31 December 2004.

At the end of 2004, the total number of members was 3134 members, increasing by 115 since end 2003 (310 departures/425 entries), mainly due to the Organization's hiring of local staff.

Beneficiaries

In 2004 the total number of beneficiaries increased from 2707 to 2837, i.e. an increase of 4.8%. Their breakdown by category is shown in the graph below.

Trends in benefits paid

The graph below shows the amounts of the various types of benefits paid by the Fund during the year under consideration and, for the purposes of comparison, the benefits paid in 2003. In absolute terms, the overall increase was 16.8 MCHF or 8% compared with the previous year. The total amount of benefits paid was 225.7 MCHF.

Financial situation

The overall trend in the Fund's financial position in 2004 is presented below in a very condensed form. It should be noted that the Fund's overall cash flow position, namely the sum of investment results at end-of-year market prices, taking account of value adjustments, and the balance between contributions and benefits, is again positive (+102 MCHF). This situation is attributable to growth in all the asset categories managed by the Fund, which resulted in an overall good performance.

Breakdown of the Fund's Assets

The breakdown of assets into different investment categories plays a very important role in the management of the Fund. The percentage breakdown of assets for 2004 is shown in the graph below and includes the figures as at the end of 2003 for comparison purposes. It should be remembered that each asset category has its own particular risk/return ratio and that studies made have shown that, to reach its long-term yield target, the Fund should invest an average of 40% of its assets in equity. The increased proportion of equities in the portfolio in 2004 is attributable first and foremost to the mechanical effect of the market recovery, but it was accompanied and amplified by targeted investments essentially in the Japanese market. It should be noted that in 2004, the Fund's currency overlay programme versus the US dollar paid off, the US dollar loosing 8% of its value.

Results of the Pension Fund in 2004

With an overall performance of + 5.6%, the Fund achieved a performance equal to the technical rate. However, it should be noted that this has not improved the funding ratio owing to the very marked increase in actuarial commitments arising from the large number of new pension beneficiaries. By way of comparison, the average performance of Swiss pension funds was 4.3% and the Fund's result can therefore be deemed quite satisfactory.

The equity portfolio performance was +7.7% in 2004 compared to +22.1% in 2003. As an indication, the Morgan Stanley Capital International (MSCI World) equity index was +5.5%. The overall bond portfolio result was +5.1% compared to the JP Morgan benchmark of + 1.2%. The currency overlay programme yielded a surplus of 28.1 MCHF. In 2004 the average real-estate portfolio performance was +6.3%. Depreciations in property value in the Netherlands and in Germany were offset by positive results in other countries. The CERN debt yielded 3.7%. All asset class performances were positive in 2004.

2001-2003 Actuarial Review

Over the period 2001-2003 covered by the latest actuarial review, commitments increased by 399 MCHF whereas assets fell by 242 MCHF. As the actuary underlined in a report at the end of the Fund's 2004 Annual Report : â??Both on liquidation (closed fund) and in the projection (open fund) using the model identified as the most probable model (Model 19), the review shows a significant technical deficit of 153.8 MCHF and 320.9 MCHF respectively, which clearly demonstrates the impact on the Fund, in both closed fund and open fund terms, of the deterioration in the economic situation since the last actuarial review. Consequently, the current contribution rate (30.37%) applied in model M19 is no longer sufficient to match the statutory plan of benefits.â?

As the actuary underlines, the outperformances of stock markets in the 1990s have thus temporarily concealed a structural problem of the Fund. All these factors raise the issue of whether the Fund has the capacity to improve its funding ratio in order to meet its commitments with regard to financing its current and future benefits.

Conclusions

Various factors have an impact on capitalised provident schemes. Some of them are well known, such as life expectancy whose increase, though welcome, means that benefits have to be paid out for increasingly longer periods. This general phenomenon is supplemented by others that are specific to CERN such as those deriving from the Organization's age structure and personnel policy relating to staff numbers. Although the membership increased by 115 in 2004 owing to a one-off effect associated with the recruitment of local staff, the general trend is nevertheless towards a reduction in staff numbers. This demographic phenomenon has a financial cost. A request for compensation for an amount of 11.2 MCHF should be accepted by the Council by the end of this year.

These demographic trends have been accompanied by a significant economic and financial phenomenon: the considerable reduction in the rate of return on the capital, which is still continuing. This trend, which is associated with the financial bear markets in 2000-2002, has a substantial impact on the performance of the last five years with an annual TWR of 0.9%, compared to the 6% of the actuarial assumptions set in 1990. The negative contribution of the three particularly difficult years 2000 to 2002 also has a substantial impact on the very long-term results (48 years) since the internal rate of return is still below the 6% threshold at 4.9% compared to 6.5% at the end of 2000. The current circumstances oblige the Fund to keep a close watch on fund manager performances, to maintain a highly diversified portfolio to act as a buffer against any sudden downturns and to seek higher-performance opportunities with an acceptable degree of risk. Unfortunately, another good year would not be enough to wipe out the effects of three years of negative financial market performances. Even very good portfolio performances in the coming years will not be enough to restore the Fund's financial balance. Without accompanying structural measures, the funding ratio will continue to remain below 100%, which is not consistent with the Governing Board's desire to maintain a fully capitalised Fund.

In the face of this structural situation, in 2005 the Governing Board has approved changes to the actuarial parameters and a package of measures aimed at restoring the long-term balance of the Fund while abiding by three principles: provision of benefits in line with the members' expectations, maintenance of the pensioners' purchasing power as much as possible and a sharing of the additional contributions effort between the employers and the employees. The main proposals adopted by the Governing Board should bring the funding ratio back to 100% by the end of the projection period (30 years). It is now for CERN's governing bodies to respond to these proposals.

These graphs and statistics are taken from the 2004 Annual Report of the Pension Fund (CERN/2611-CERN/FC/4925), which members and beneficiaries may obtain from Departmental Secretariats or the Administration of the Fund (Tel. 767 91 94) respectively. The Annual Report contains detailed information on all aspects of the Fund's activities, including movable assets and real-estate investments, trends in the situation concerning members and beneficiaries, and the main matters dealt with and the work done by the Fund's bodies. If you are interested in the affairs of your Pension Fund, we strongly encourage you to read the Annual Report or to consult the Fund's Web site (http://cern.ch/Pensions) and to attend the Annual General Meeting, whose agenda you will find above.

by Pension Fund