Pension Fund Governing Board

Note

The CERN pension scheme is based on the principle of defined benefits, so beneficiaries continue to receive the benefits to which they are entitled in accordance with the Rules of the Pension Fund. This means that pension entitlements under the Rules are not directly affected by the financial crisis and the current economic situation. However, the adjustment of pensions to the cost of living is not automatic and, under the method applied since 2006, must take into account the Fund’s financial position.

Meeting of the Pension Fund Governing Board

The Pension Fund Governing Board held its eighth meeting at ESO in Garching (near Munich), Germany on 24 October 2008. Before starting its work, the Governing Board had the privilege of hearing an opening address by Professor Tim de Zeeuw, the Director General of ESO. Professor de Zeeuw described the mission of ESO and the ambitious projects of his organisation, which performs astronomy observations using telescopes located in Chile. The Director-General received a warm round of applause.

The Governing Board then turned to the diverse subjects on its agenda. It approved the draft text of the document on pension indexation, which recommended a 2.6% indexation of pensions, fixed amounts and allowances for 2009. It should be noted that when this document was submitted to CERN’s Finance Committee at its 5 November 2008 meeting, the Committee was unanimous in agreeing to recommend it for approval by the CERN Council, which meets on 12 December.

The Board members next heard progress reports from the working groups. Working Group 2, which is responsible for examining the Pension Fund’s funding policy and principles, is making steady progress. The actuary has been asked to provide answers to a number of technical questions regarding the funding ratio, taking into account in particular the implications of acquired rights for the measures envisaged. Working Group 4, whose remit covers the organisation of the Fund’s administrative unit, has formed a selection board for the new general manager, which will include other Board members as well. Examination of applications will commence before the end of the year.

On the subject of investments, the PFGB took note of the current situation and, in particular, the decline in the Fund’s assets as a result of the international financial crisis. Plunging stock prices are exercising downward pressure on the entire investment portfolio of the Pension Fund. At the end of October, the performance of the Fund’s assets stood at -18%. October was a particularly difficult month for stock markets around the world: the average fall for October was as substantial as for the first nine months of the year put together, which were in any case not good. Naturally, all capitalised pension funds are being hit hard by the worldwide crisis, given their exposure on the stock markets, where losses since the start of the year exceed 40%. At times like this it is important not to lose sight of the fact that capitalisation remains an appropriate and effective long-term solution for building up an institution’s pension scheme assets. Thus, the investments of the Pension Fund have made up a significant portion of the pension benefits paid out. In any event, despite the crisis the Pension Fund has sufficient liquidity to cover its short-term and long-term obligations to members and beneficiaries.

Present circumstances are having a negative effect on very many pension funds, which are seeing their funding ratio drop below 100%. CERN’s Pension Fund is no exception. The Pension Fund already had a structural imbalance, which is now being exacerbated by the current major crisis.

Regarding the investments themselves, the strategy of the Pension Fund’s bodies has been as follows: in 2007, reduce exposure to shares; shun classes of assets that are highly opaque or complex, including hedge funds, highly structured products, and speculative investments such as CDOs and CDSs ; re-evaluate counterparty risks; for cash, use the account held with the Swiss Federal Finance Administration in Berne, which offers an excellent safety margin; avoid securities loans; reduce commodities holdings (progressive reduction since the fourth quarter of 2007); and increase the hedge against exposure to the euro to 75%, in late 2007 and early 2008.

Despite the current adversities, the Pension Fund continues to believe in the merits of the market economy and is maintaining its diversified portfolio of both fixed-income and variable-income holdings. Company shares will always have a place in such a portfolio if one takes a long-term view. However, this requires remaining steadfast in the face of dramatic day-to-day fluctuations and turbulence on the financial markets. The Pension Fund carefully monitors its risk/return profile, while avoiding the mistake of looking only to past performance to assess future risks. That is why it is important for the Fund to conduct its own studies to identify the investment opportunities that best meet its requirements, taking into account its specific structure and the long-term return target of 5%. For the same reason, critical judgement with regard to ratings agencies, for example, remains essential. And, of course, the Pension Fund is always on the lookout for ways of containing its costs.

Given the magnitude of the present crisis and the scarcity of confidence on the markets, it is clear that the gradual return to ‘normality’ will take time. Falling share prices have profound repercussions on economic activity, which are only beginning to make themselves felt. However, despite the current very substantial downturn, new investment opportunities will gradually emerge, and as they do the economic players will change their assessment of the situation.

The Pension Fund remains steadfast in its determination to overcome these difficulties, as it has in the past. The Pension Fund Governing Board, the Investment Committee and the Fund Administration are closely monitoring developments.

Finally, the PFGB noted, with regret, the deaths of the following beneficiaries:

Mr Daniel ENARD, Mr André ROCHEX, Mrs Lina LAYDEVANT, Mr Louis LEVRAT, Mr René MALEYRAN, Mrs Monique LEROY, Mr Horst WACHSMUTH, Mr Jean-Paul BUATHIER, Mrs Marianne WITTWER, Mr Hans ANDERS, Mrs Josiane YERLY-DELY, Mrs Adelina CAVALLI, Mr Giovanni RUOCCO, Mrs Odette GRUTTER, Mrs Kathe KOWARSKI, Mrs Jeanne EYMANN-GENTIZON, Mr Armand BARISY, Mr Giuseppe COCCONI.

by HR Department