Summary of the Pension Fund's activities in 2007

Introduction

The year 2007 was characterized at the institutional level by the implementation of the new governance scheme in the Pension Fund.

The previous Governing Board was active until the end of October, laying the groundwork for important decisions that the new Governing Board was thus able to take. The first meeting of the Pension Fund Governing Board was held at ESO Headquarters in Germany on 16 November.

Among the new measures, the following may be highlighted:

• Definition of procedures for reporting to the Finance Committee and the Council;
• Ongoing elaboration of a code of conduct;
• The setting-up by the PF Governing Board of four working groups with the following terms of reference:
• Revision of those Rules and Regulations of the Pension Fund that are directly affected by the changes deriving from the Council’s decisions concerning the governance of the Pension Fund;
• Definition of funding policy and principles;
• Search for experts for the Investment Committee;
• Search for a General Manager, reorganisation of the Pension Fund Administration and examination of related staffing issues;
• Audit procedures: the Pension Fund will be under the scrutiny of different audits: by the External Auditors, the Internal Audit Service and auditors specialising in pension funds;
• An appropriate solution will soon be put in place to address the long-standing problems concerning the Pension Fund’s IT resources;
• Review of the Actuarial Review and the actuary’s recommendations;
• Approval of a new Strategic Asset Allocation, optimised to obtain the return target with a reduced risk for the Pension Fund;
• The adoption of International Public Sector Accounting Standards (IPSAS) for the Pension Fund, in line with the Organization’s decision to adopt them. IPSAS accounting standards will be applied for the first time in drawing up the 2008 accounts.

Governing Board (as of 31 December 2007)

Administrator: C. Cuénoud, appointed by the Council on the proposal of the PFGB with the consent of the Director-General.

Summary

The Pension Fund provides coverage against the economic consequences of old age, invalidity and death. When an insured person (member or beneficiary) becomes invalid or dies, the Fund may pay a pension to the children of beneficiaries of a disability pension or to the surviving spouse or orphans of deceased retired members, as appropriate.

The Fund also pays out transfer values in cases where a Fund member retires prior to retirement, and under certain conditions it may offer a deferred pension.

By comparison with the two preceding years, characterised by very good performances, 2007 showed a more modest overall result of 6.2%. This overall return is still significantly better than the average of the Swiss pension funds (2.1% according to the Swisscanto survey).

The key figures for 2007 and 2006 are compared in the table below:

¹⁾ Assuming liquidation without pension indexation

The time-weighted return (TWR), calculated for the preceding five-year period, increased from 5.9% (2002-2006) to 8.4% (2003-2007), a rise of nearly 2.5 percentage points. This is because the statistics now include a good year (2007) and no longer include data for the negative year 2002 (-5.5%). The Fund’s performance of 5% over ten years has thus been brought back into line with the objectives set by the CERN Council. Taken over the Fund’s 50-year lifetime, the results of the past decade, which began with three particularly difficult negative years, do not affect the long-term performance substantially, as the 5% rate used in the technical assumptions has been achieved. This shows that the 4.5% technical rate chosen by the Council, taken over the long term, is consistent with the gross rates of return achieved by the Fund. Over the last 15 years, these rates have been achieved only by investing a large proportion of the Fund’s assets in equity portfolios with the aim of optimising long-term profitability.

Figure 1

Members

The figure 1 shows membership as at 31 December 2007.

The figure shows membership as at 31 December 2007, including those whose contract terminated on that date. There were 302 departures from the Participating Organizations. These included 98 retirements, of which 66 were early retirements, i.e. before the age of sixty-five, and 32 members retiring at 65. In 2007 the number of members decreased by 75.

Figure 2

Figure 3

At 31 December 2007, the average age of members was 41 years and 8 months for women and 43 years and 9 months for men. Compared to 2006, the average age (for men and women alike) increased slightly. The figure 2 shows the age distribution of the Fund membership.

Figure 4 - In millions of Swiss francs

Beneficiaries

In 2007 the number of beneficiaries, including participants in the Progressive Retirement Programme, reached 3105, representing a 2.9% increase compared to the total at 31 December 2006 (3017).

It should be noted that the number of beneficiaries below 65 is still large in absolute terms. Currently 431, this number will certainly decrease over time, due to the fact that an increasing number of persons working at CERN and ESO will have joined these Organizations after 30 June 1987 and will be subject to the actuarial reduction factors if they retire before the age of 65 (figure 3).

Figure 5

Figure 6

Overall assets

Financial Position

The overall trend in the Fund’s financial position in 2007 is summarised in figure 4. It should be noted that the result of the Fund’s overall accounting movements, 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 +140 MCHF.

Investments and performance

Investment performance in 2007 (figure 5) was marked by high volatility, but the Fund surpassed its objective. By way of comparison, the performance of the vast majority of Swiss pension funds was considerably lower, the median figure being 1.8% (source: Association Suisse des Institutions de Prévoyance).

The figure 6 shows the Fund’s overall risk/return profile for the 24 months of 2006 and 2007 and, for comparison, the risk/return profile of the Pictet LPP40 Plus index, whose asset allocation most closely resembles that of the Fund. The Fund is seen to be more volatile than the benchmark and the Pictet index, but it also achieved a performance superior to both of those references.

Breakdown of assets

To optimise long-term risk and performance parameter assumptions, an asset-liability modelling exercise is carried out as a basis for determining the strategic asset allocation. The exercise takes into consideration all the Fund’s specific characteristics (demographic data, contributions, benefits, indexation, etc.), and sets long-term objectives. Margins of fluctuation around the strategic asset allocation allow tactical adjustments. The strategic allocation is the main component of investment policy to achieve long-term target returns, while tactical adjustments reflect short-term responses to prevailing market conditions. The Investment Committee is responsible for making such tactical adjustments.

Over the course of the year, the main tactical decisions taken by the Investment Committee were:

• to maintain the underweight in bonds;
• to cancel out the overweight in equity, notably through a reduction in European, US and emerging-market equities in favour of cash; this was done mainly in May, June and July;
• to close the USD and GBP interest rate swaps in November;
• to set the EUR–CHF exchange rate hedge ratio at 50% at the end of December.

Closed-Fund position

At the end of 2007 overall actuarial liabilities amounted to 4 339.4 MCHF, broken down as follows:

• active members: 1 116.8 MCHF,
• pensioners: 3 113.6 MCHF,
• life-expectancy provision: 109.0 MCHF

The mathematical reserve for pensioners is becoming increasingly predominant and currently accounts for nearly three quarters of the Fund’s actuarial commitments (compared with a little over two-thirds ten years ago). Based on the number of pensioners at the end of 2007, this amounts to 1 MCHF per beneficiary, all beneficiary categories included. It is clear that the inertia due to the sheer size of the mathematical reserve for beneficiaries (which is almost three times that of the reserve for active members) has the greatest impact on the balance of the Fund when pensions are indexed.

With a funding ratio of 106.3%, the Fund’s risk capacity remains insufficient in the current financial circumstances. Taking into account the indexation rules, the economic and actuarial assumptions, and in particular a technical rate of 4.5% and the 5% rate of return used by the CERN Council, only a funding ratio of 120% to 130% would offer a sufficient safety margin (fluctuation reserve) to protect the Fund against under-funding. In these circumstances, the Fund can only extract itself from this dilemma by clearly determining the terms of its funding policy. Under the new governance structure, a funding and investment plan will be the subject of a specific decision by the Fund’s bodies.

Conclusion

The Fund entered its maturity phase several years ago, which means that it can no longer take as much risk as a young fund with a rapidly growing number of insured members and rising contributions, since the impact of such increases is much more modest than in the past. It is now more difficult to maintain a good degree of stability as the Fund has become more sensitive to any upsets on the financial markets. Under these conditions the Fund must be particularly careful to seize the best investment opportunities (emerging markets, commodities, private equity, infrastructure) while keeping portfolio risk under control as far as possible and focussing more on absolute performance, i.e. seeking to take advantage of upward trends in the markets and reducing the negative impact of bear markets. As the Chairman of the Governing Board noted in his preface to the 2007 Annual Report, "the Fund’s financial performance cannot, on its own, solve the structural problems" of a mature fund such as the CERN Pension Fund.

The graphs and data used in this summary are taken from the Annual Report of the CERN Pension Fund for 2007 (document CERN/2792-CERN/FC/5248), which members and beneficiaries may obtain from Departmental Secretariats or the Administration of the Fund (Emilie Clerc, tel. 022-767 87 98), 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 would like more detailed information about your Pension Fund, we strongly encourage you to read the Annual Report or to consult the Fund’s Web site and to attend the Annual General Meeting, whose agenda is indicated above.

by HR Department