MINISTERS’ DEPUTIES

CM Documents

CM(2022)36

23 February 2022[1]

1430th meeting, 30 March 2022 11 Programme, Budget and Administration   11.4 Pension Reserve Fund of the Council of Europe a. Second report for 2021 of the Management Board to the Committee of Ministers Item to be considered by the GR-PBA at its meeting on 17 March 2022

 

1.            In accordance with the Statute of the Pension Reserve Fund (PRF), the Management Board of the PRF reports to the Committee of Ministers at least twice annually. This note represents the Second Report for 2021 and summarises the work carried out by the Management Board since the last report, [CM(2021)95]. It presents the situation of the PRF at 30 September 2021.

I. MARKET BACKGROUND

2.            Over Q2 2021, equities rose as vaccination campaigns continued to accelerate in most developed economies, especially in Europe, which caught up with the United Kingdom and the United States, while emerging economies continued to lag on the vaccination front.

3.            Governments in most developed markets continued to ease Covid-19-related mobility restrictions and activity levels picked up. Economic data over the quarter has generally been very strong, especially in the United States, which posted an annualised growth rate of 6.4% in Q1. However, the reopening of economies and the quick rebound in activity that has followed has fuelled inflation in some countries.

4.            Over Q3, Developed Market Equities were broadly flat after a moderate decline in September erased the quarter’s prior gains. China’s move to turn private tutoring companies into non-profit organisations worried investors, who started to question whether similar actions could be applied to other sectors. Then, more regulations on the technology sector were announced, including a ban on children playing computer games for more than three hours per week. Finally, investors had to deal with fears around the potential default of a large Chinese property developer (Evergrande) and the potential spill over effects. All this has weighed on Chinese Equities and dragged Emerging Market Equities down over the quarter.

5.            In this context, the MSCI World index and MSCI EMU posted strong returns of +9.26% (in EUR) and +6.12%, respectively over the period under review (31 March 2021 to 30 September 2021), supported by the reopening of economies and strong global goods demand. The MSCI Emerging Markets indexes (in EUR) returned -2.09%, driven by Chinese Equities strong underperformance, despite some markets, such as India, continuing to perform well. In fixed-income markets, World Government Bonds (hedged in EUR) posted a return of +0.47% for the period under review, while the Euro Investment Grade Credit Market recorded a performance of +0.36%.

II. PRF INVESTMENT STRATEGY

6.            On 15 May 2018, following the Third Three-Year Review of 2017, the Committee of Ministers approved a new Investment Strategy, or Strategic Asset Allocation (SAA). The new SAA aims at an average Annual Net Real Return of 3.4% in the long term (with an associated Volatility of 7.8%). It is composed of 45% Global Equity, 10% Emerging Markets Equity, 23% Global Government Bonds (EUR hedged), 12% Euro Corporate Bonds, 5% Global Direct Real Estate, and 5% Global Direct Infrastructure. The existing Socially Responsible Investments (SRI) Strategy (see below) for Equity and Corporate Bonds was maintained. No specific SRI criteria apply to Global Government Bonds since the issuers are mainly members or observer countries of the Council of Europe. Investments in Real Estate and Infrastructure may be placed in traditional (non-SRI) Investment Vehicles as long as when combined, they represent less than 10% of the Portfolio.

7.            The implementation process of the new SAA is monitored by the Board, as investments are executed based on the Investment Procedures approved by the Board as well as the Board’s decisions regarding Vehicles, Asset Managers and Transition Strategy. The revision of contracts with Asset Managers is handled by the Secretariat in conjunction with the Council of Europe. At 30 September 2021, the new SAA was fully implemented with exception of the Infrastructure Allocation (5% of the SAA), for which the Asset Manager Selection Process (through an Advisor) is still ongoing.

III. Investment Policy - Objective of the Council of Europe for the PRF

8.            The Investment Strategy of the PRF was established to attain the objective of the Council of Europe for the Fund, as stated in its Statute (Article 1): "The objective of the Pension Reserve Fund (“the Fund”) is to smooth, in the medium and long term, the financing of the member states’ obligations under the Organisation’s Pension Schemes"^[2]. This objective was defined in a context of increasing expected budgetary expenditures for pensions where, in the future, in order to be able to meet the pension obligations, member States could be required to largely and abruptly increase their annual contributions. To avoid this, the Council of Europe decided:

·         to immediately increase the contributions to pensions and to allocate the surplus to an Investment Fund, so that contributions would not be abruptly augmented in the future;

·         to create an Investment Fund for which the return on investments could generate extra income to help to fund the pensions.

9.            In summary, by creating the PRF, the Council of Europe intended to smooth the contributions of member States over time and also to create an extra source of income. This implies that as long as the PRF exists, member States’ contributions to the PRF will increase more steadily, and they will be less than if the Fund did not exist. In parallel, in the event that the PRF is depleted, contributions will need to be augmented abruptly in order to fully cover the future increase in pension benefits and to replace the income generated by the PRF investments.

10.          On this basis, when examining the Investment Policy in the Three-Year Review in 2017 and again in the Intermediate Review in 2019, the Management Board defined the primary objective of the investments as: “[…] to expand the life of the Fund while keeping a reasonable level of risk”. In other words, it was understood that the target of the investments was to keep the Fund sustainable, so that the pensions could be paid perpetually without exhausting the Fund, thanks to the contributions and the revenue of the investments. In parallel, the Management Board considered that a Target Real Return of 3.4% would bring a reasonable level of risk.

11.          The factors leading to the sustainability of the PRF are being analysed by the Board this year during the Four-Year Review, in view of proposing an optimal Investment Strategy for approval of the Committee of Ministers in early 2022. During the Review, the Board looked at several updated (data at end 2020) scenarios of the evolution of the life cycle of the PRF, with a GCR of 40.61% as from 2022, as depicted in the graph below:

Graph 1: PRF Life Cycle as of end-2020

Source: SIRP/E(2021)22 2022 Global Contribution Rate

12.          The Board notes that 3.4% is the required return to make the PRF sustainable with a GCR of 40.61% as from 2022. The updated return assumptions during the Four-Year Review show that 3.4% could be achieved only with changes in the SAA; therefore the Board is now considering a SAA that can generate a reasonable risk and will present a proposal for approval of the Committee of Ministers.

IV. PRF ASSETS AT 30 SEPTEMBER 2021

13.          At 30 September 2021, the value of the PRF's Total Assets in Portfolio amounted to EUR 561.1 million (30 September 2020: EUR 460.3 million). The Total Assets consisted of EUR 549.6 million in Portfolio Investments (30 September 2020: EUR 447.9 million), and of EUR 11.5 million in Treasury (30 September 2020: EUR 12.4 million). The Treasury complements the monthly transfer of staff and member State contributions that serve to pay monthly pension benefits and administration costs.

V. Return of the PRF

14.          The return of the PRF is presented below in two manners, each analysing the performance from a different perspective: the Time Weighted Return (TWR) or Return on Investment Vehicles, and the Internal Rate of Return (IRR) or Actual Annual Return.

15.          The TWR is an industry standard used to measure Asset Managers’ results over a period of time. The TWR allows to compare the PRF investment results and the Board’s mandate to invest according to the approved SAA represented by the benchmark. In doing so, the TWR does not take into account the impact of the timing of investing new contributions, as the timing of inflows is beyond the Board’s control. The TWR allows for the evaluation, and if needed, rectification of the Asset Management if the external manager’s returns are below the Benchmark returns. The TWR also allows assessing the impact on the investment results of any deviations from the SAA decided by the Board. Finally, from a long-term perspective, the TWR also measures if a certain Investment Strategy is meeting its expected return^[3].

16.          Since its inception in 2008, the PRF has received regular inflows, the timing of which have had an impact on the total return of the Fund. The IRR reflects the Actual (or effective) return of the PRF, taking into account both the return earned by the Asset Managers appointed to implement the Investment Strategy and the effect of the actual timing of investment of the incoming contributions.

17.          The difference between the TWR and IRR can be attributed to their distinct calculation methodologies used to calculate between them and to the (timing of) investment of new contributions each year.

Actual Annual Return

18.          Table 1 presents the PRF's Actual Annual Return (measured by the Internal Rate of Return or IRR) as of 30 September 2021, since the start of the PRF portfolio in February 2008, since the change of target return of the Fund in January 2017, and since the start of implementation of the current Strategy in May 2019.

Table 1- PRF ACTUAL ANNUAL RETURN AT 30 SEPTEMBER 2021

Source: Aon; European Central Bank for French Inflation Harmonised Index of Consumer Prices (HICP).

19.          Following the Third Three-Year Review, the Real Target Return of the PRF was set to 3.4% as from January 2017. The Management Board has been working to achieve the implementation of the new Strategic Asset Allocation deemed to meet that target. The implementation of the new strategy started end-April 2019, and the IRR has been positively impacted since then by the recent market rally following the Covid-19 crisis. Since January 2017, the IRR has also benefited from the recent rebound, despite the negative return observed at the end of 2018.

20.          The Management Board notes that the long-term performance of financial markets has contributed positively to the return of the Fund since inception in 2008 to date, despite the strong impact of the Global Financial Crisis of 2007-2009, the Euro-area Sovereign Debt Crisis of 2011, the Drawdown of late 2018 and the Covid-19 crisis. After careful analysis in the Third Three-Year Review (2017), which was confirmed in the Intermediate Review (2019), the return expectations were lowered given the low interest rate levels, GDP growth and productivity, and the current valuations in Equity Markets. This had implications for the reasonable or achievable target return, which decreased substantially (from 5% to 3.4%), as well as for the PRF's Investment Policy and Strategy, and ultimately for member States’ contributions to the PRF.

21.          During the Four-Year Review of 2021, the assumptions of Expected Reasonable Return are being reviewed. The Board did a preliminary estimation of the Reasonable Rate of Return in November 2020 (for inclusion in the GCR study) and decided to maintain it at 3.4% with two caveats:

·           the long-term estimations of economic growth, which form the basis for the estimation of the Reasonable Target Return (RTR), have not been updated yet with the impact of the Covid-19 crisis;

·           the current unusual situation of ultra-low interest rates makes the return expectations for Fixed-Income Assets and of the overall Portfolio in general more uncertain.

22.          Due to the likelihood of the RTR differing from 3.4%, the Board recommended that the GCR study include and analyse lower rates, such as 2.5% and 3%.

23.          The Board would like to emphasise that past returns cannot be considered a sound estimation of future returns. As for the reasons that may explain the lower expected returns estimated in the Four-Year Review, compared to past observations, the Board can suggest the lower GDP growth forecasts, the current level of interest rates which needs to be taken into account to estimate long-term interest rates, and current market levels being very high as a consequence of low interest rates and high liquidity.

24.          As it was said before, the update of the return assumptions during the Four-Year Review of 2021 show that 3.4% could be achieved only with changes in the SAA; therefore the Board is now considering a SAA that can generate a reasonable risk and will present a proposal for the Committee of Ministers’ approval.

Return on Investment Vehicles

The nominal Return on Investment Vehicles (measured with the TWR) on both an annual and annualised basis is presented in Table 2 below. Table 2 details the evolution of Investment Vehicles and Benchmarks since the Fund's inception date, and Table 3 focuses on the evolution since implementation of the current Strategy.

Table 2- PRF NET NOMINAL RETURN ON INVESTMENT VEHICLES SINCE INCEPTION OF THE FUND

Source: SGSS until end 2019; Aon thereafter.

Table 3 - PRF NET NOMINAL RETURN ON INVESTMENT VEHICLES SINCE THE START OF THE CURRENT STRATEGY

Source: SGSS (Société Générale Securities Services) until end 2019; Aon thereafter.

25.          Table 2 above shows that the PRF Nominal Annualised Return on Investment Vehicles was 44 basis points above the Benchmark Index since start of the PRF investments in 2008. This positive difference can be attributed to the judicious decision of the Board not to invest in Real Estate from February 2008 until November 2009, a period during which the Real Estate market declined significantly. The relatively good performances of the SRI Equity Managers, Allianz and Amundi, the Global Government Bonds Manager, J.P. Morgan, and the former Real Estate Equity Manager, Allianz, also contributed to the overall over-Performance.

VI. PRF COSTS

26.          The PRF bears two types of costs:

a.      costs related to Fund Administration provided by the International Service for Remunerations and Pensions (ISRP) as Secretariat of the Management Board and Fund Administrator, and other Providers. These costs concretely cover: Secretariat's ISRP Staff, OECD Operating Services linked to the activity of the Secretariat within the OECD, Missions of the Secretariat and the Management Board, the Custodian Bank, Performance Reporting[4] and Databases, Consultants, Accounting Advisory and Special Linguistic Requirements. These costs are presented and approved by the Board and the Council of Europe on a bi-annual basis [last report: Operating Budget 2022-23 [PRF/MB/WD(2021)11]].

b.      Asset Management Fees and Costs, related to the External Investment Vehicles managing the long-term Assets of the PRF. They are approved by the Board when the Investment Vehicles are selected, and they are either deducted from the investment or paid directly to the Asset Managers.

27.          The Board monitors the annual evolution of the costs. In the last Report [PRF/MB/WD(2021)22] related to 2020, the ratio of Asset Management Fees and Costs/Long-term Assets was 0.26%, the ratio of Administration Costs/Total Assets was 0.07%, and the ratio of Total Costs/Total Assets was 0.32%.

VII. Engagement Overlay

28.          Upon the approval of the Second Three-Year Review, the Committee of Ministers asked to be informed of the actions taken by the SRI Engagement Overlay Service Provider. This information is presented hereafter.

Overview of the Engagement Process

29.          The purpose of the Engagement Overlay Service is to engage with companies held in portfolio with a view of promoting the adoption of better Environmental, Social and (Corporate) Governance (ESG) practices, in part to make companies’ activities that positively impact the United Nations Sustainable Development Goals relevant for investors.

30.          The provider that was selected is named F&C Investments, renamed BMO Global Asset Management (BMO GAM) after its acquisition by BMO Financial Group in 2014. The latter is an Asset Management Company, fully owned by the Bank of Montreal Group.^[5] BMO GAM has been active in engagement since the launch of the first Ethical Investment fund in the United Kingdom by F&C in 1984. On 23 April 2021, BMO announced that they would become part of Columbia Threadneedle Investments, the Global Asset Management Business of Ameriprise Financial, Inc.^[6] Columbia Threadneedle was a founding signatory of the Principles for Responsible Investment (PRI), and responsible investing has long been integral to their investment research and decisions.

31.          BMO GAM engages in dialogue with companies from the investment universe by adopting one of the following three approaches:

●          a proactive manner, i.e. BMO contacts companies with perceived signs of weaknesses according to the ESG criteria, defined as priority companies;

●          a reactive manner, i.e. BMO contacts companies after incidents have occurred; or

●          athematic manner, i.e. BMO engages in dialogue on a sector or regional basis, targeting specific ESG themes.

In addition, BMO GAM also engages with Policy Makers and Regulators where they seek to be a constructive investor voice, and to advocate policies that raise the bar for the management of ESG risks faced by the companies in which its clients invest.

32.          BMO GAM prepares an annual Priority List of companies to engage with, based upon the risk scoring of each company (as defined by their internal ESG-risk tool) and the most material financial holdings within their clients’ portfolios. During the year, other companies can be added to this list, in the event that reactive engagement is urgently needed. For each company on the list, BMO GAM sets targeted outcomes of improved ESG practices that it wants to achieve with the company.

33.          The engagement actions undertaken by BMO GAM cover most of the topics described in the SRI Policy of the Council of Europe; the majority of them have a connection to conventions and international standards originating from the United Nations and the International Labour Organisation.

34.          BMO GAM engages in dialogue with companies using different methods, notably in-person meetings, conference calls, written correspondences and emails. These contacts can be engaged with at different levels within the company, for example at Board-level and C-level, with Management and specialists within the organisation. Though BMO GAM typically leads these one-on-one discussions face-to-face, they may also sometimes decide to participate in group meetings or work with other stakeholders and investors, if this could lead to a better outcome.

35.          Engagement procedures with companies can have different time horizons. In BMO GAM’s experience, an average period of two to three years is needed to either reach a positive outcome or to come to the conclusion that the engagement has failed.

36.          To follow up on the process and measure its success, BMO GAM sets milestones for every engagement started. A milestone is reached when a pre-defined change in behaviour (the behaviour BMO GAM requests) is adopted by the company. At the same time, each action item consists of multiple intermediate milestones allowing the progress towards the final outcome to be measured.

Engagement Report Q3 2021

37.          BMO GAM reported that during Q3 2021, they have carried out engagement activities with 260 companies from 33 countries and have achieved 73 milestones. Tables 4, 5 and 6 below summarise this activity:

Table 4
BMO GAM ACTIVITY – NUMBER OF COMPANIES
ENGAGED BY REGION

Source: BMO GAM

Table 5
BMO GAM ACTIVITY – NUMBER OF COMPANIES
ENGAGED BY ISSUE

Source: BMO GAM

*Companies may be engaged on more than one issue

Table 6
BMO GAM ACTIVITY – NUMBER OF MILESTONES
ACHIEVED BY ISSUE

Source: BMO GAM

BMO GAM produces a quarterly report covering the Priority Companies, Engagement Case Studies, Engagement Projects and Milestones. The Management Board has decided to publish the Priority List in this Report. More detailed information on other areas of the Engagement Activity can be obtained upon demand.

Engagement Priority List

Table 7 - BMO GAM ENGAGEMENT PRIORITY LIST

Themes engaged

Name

Sector

ESG Rating

Response to Engagement

Climate change

Environmental Standards

Business Conduct

Human Rights

Labour Standards

Public Health

Corporate Governance

AbbVie Inc

Health Care

ORANGE

Poor

•

•

Alleghany Corp

Financials

RED

Adequate

•

Amazon.com Inc

Consumer Discretionary

ORANGE

Poor

•

•

Aroundtown SA

Real Estate

YELLOW

•

Bandai Namco Holdings Inc

Consumer Discretionary

RED

•

•

Barclays PLC

Financials

GREEN

Good

•

•

•

Capital One Financial Corp

Financials

YELLOW

•

China Construction Bank Corp

Financials

YELLOW

Poor

•

Cintas Corp

Industrials

YELLOW

•

Danske Bank A/S

Financials

GREEN

Good

•

Dominion Energy Inc

Utilities

YELLOW

Good

•

DSV A/S

Industrials

YELLOW

•

•

Eli Lilly & Co

Health Care

YELLOW

•

•

•

•

Fresenius SE & Co KGaA

Health Care

ORANGE

Good

•

•

Hannover Rueck SE

Financials

GREEN

•

Honda Motor Co Ltd

Consumer Discretionary

GREEN

•

•

•

Intesa Sanpaolo SpA

Financials

GREEN

Good

•

Kansai Electric Power Co Inc/The

Utilities

ORANGE

•

Keyence Corp

Information Technology

ORANGE

Adequate

•

Marriott International Inc/MD

Consumer Discretionary

RED

•

•

•

•

Moncler SpA

Consumer Discretionary

GREEN

•

Mondelez International Inc

Consumer Staples

YELLOW

•

•

•

National Australia Bank Ltd

Financials

YELLOW

•

Reliance Industries Ltd

Energy

ORANGE

•

•

Royal Dutch Shell PLC

Energy

GREEN

Good

•

Saudi Arabian Oil Co

Energy

RED

•

SMC Corp

Industrials

ORANGE

•

Suncor Energy Inc

Energy

YELLOW

•

UnitedHealth Group Inc

Health Care

RED

Adequate

•

•

•

Universal Health Services Inc

Health Care

RED

•

•

•

Wells Fargo & Co

Financials

RED

Adequate

•

Wesfarmers Ltd

Consumer Staples

GREEN

•

•

ESG Risk Rating: Rating of a company's ESG risk exposure and risk management compared to industry peers. Source: MSCI ESG Research Inc.

Top quartile

GREEN

2nd quartile

YELLOW

3rd quartile

ORANGE

Bottom quartile

RED

Source: BMO GAM

Engagement Updates:

38.          More detailed information on examples of BMO’s areas of the Engagement activity can be found hereafter:

Thematic Engagement

·         Net Zero – Leading up to the 2021 United Nation’s Climate Change Conference COP26, the Conference of the Parties taking place in Glasgow in late October – mid-November 2021, BMO is continuing to focus their climate change engagement on the objective of achieving net zero global greenhouse gas emissions by 2050. Much of their engagement of late has focused on the methodologies so far developed, as well as encouraging robust implementation strategies. A key framework here is the Climate Action 100+ Net Zero Company Benchmark, which sets out best practice expectations.

·         Antimicrobial Resistance (AMR) – November 2021 brought World Antimicrobial Awareness Week (WAAW): the 2021 theme is “Spread Awareness, Stop Resistance”. The campaign calls on Stakeholders – including Policymakers, Health Care Providers and the General Public – to raise awareness of AMR and demonstrate how our actions can affect its spread. In total, from May 2019 – October 2021, BMO engaged over 60 companies on AMR, and they will continue their engagement in a cross-sector approach.

·         Human Rights Due Diligence – All companies should have a robust approach to minimise and remediate adverse human rights impacts, in alignment with the UN Guiding Principles on Business and Human Rights. However, the 2020 Corporate Human Rights Benchmark (CHRB) found that 95 out of 230 companies failed to score any points related to the Human Rights Due Diligence indicator. As such, BMO joined 208 Institutional Investors representing $5.8 trillion in AUM in signing a statement expressing concern for these low CHRB scores, calling on companies to improve their Human Rights Due Diligence approaches and set Investor expectations. Co-ordinated by the Investor Alliance for Human Rights, where BMO serves on the Advisory Committee, this letter was sent to the 95 companies in May 2021.

Project Update

·         Human & Indigenous Rights in Extractives

o    Project objective: BMO initiated a two-year engagement project focused on Human and Indigenous Rights in the Mining, Renewable Energy, and Oil and Gas sectors. Initial aims of the project are to encourage transparency regarding grievance processes, cases, and remediation and to gauge a better understanding on emerging Best Practices.

o    Project progress: BMO has spoken so far with several Mining companies this year in different jurisdictions, including Antofagosta in Chile, Rio Tinto in Australia and Barrick Gold and Wheaton Precious Metals in Canada. The aim of their meetings with the miners was to obtain an initial sense of their approach, specifically to Indigenous Rights and Free, Prior and Informed Consent (FPIC). So far, BMO is seeing a few emerging Best Practices, including publishing agreements with Indigenous Communities where consent was gained, and ensuring that FPIC is an ongoing and well-informed process.

o    BMO has also had meetings with external experts to help them create realistic but stretching expectations for companies on improving Human and Indigenous Rights Performance. They spoke to the Responsible Mining Foundation (RMF), which runs the annual Responsible Mining Index, as well as experts on Human Rights Defenders at the Business and Human Rights Resource Centre.

o    The next phase of the project will include a deeper dive with all companies on BMO’s Target List to encourage them to adopt those Best Practices.

Company Engagement Case Study

Company: Ubisoft

Country: France

Sector: Information Technology

Theme: Labour standards

Issue: Fair wages and work misconduct

39.          Background: Last year, this French video game company had its own #MeToo movement, with several high-level employees accused of misconduct. Reports pointed to an internal culture where long-tenured employees with links to the Founders were not held accountable, alongside an HR department that systematically ignored complaints. BMO spoke to the company in the initial wake of these allegations, where they detailed their plans to conduct a third-party review of all claims and the company's HR functions: how they survey staff; and the planned introduction of new roles for Diversity and Cultural Leadership. BMO encouraged the company to provide regular updates to Investors and emphasised the need for the independent Board Members, not just Senior Management, to oversee reforms.

40.          Action: Following their initial meeting, BMO saw a steady trickle of updates from the company, as both people who were accused of misconduct were fired, and new Cultural Oversite roles were appointed. Nearly one year afterwards, BMO discussed the company’s progress with Ubisoft’s CFO this quarter and was pleased to learn that the company had recruited a new Chief People Officer, who now sits on the Executive Committee; a dedicated Diversity Officer; as well as a new Head of Workplace Culture. In addition, the HR Department reporting structure has been reformed, with a third-party anonymous complaint mechanism introduced. Finally, on-going anti-harassment training will be provided to all Staff and a new Code of Conduct will soon be released, reinforcing a zero tolerance attitude to abuse.

41.          Verdict: Overall, BMO welcomes the progress that the company has made in the last year, both in investigating previous offenses and disciplining those involved, as well as trying to introduce lasting change to internal governance practices to ensure that cases of misconduct are not repeated. At the same time, it seems that the company is still figuring out what business as usual will look like. BMO pushed the company to disclose metrics to demonstrate the fruit of their efforts and how culture is improving. Aware of this need, the company cautioned that as a video game company, it has to be careful what it discloses publicly and how it is interpreted by its end users, which is much appreciated. BMO continues to engage the company on Cultural Reforms and Corporate Governance.

VIII. Evolution of the Fund

42.             Table 8 presents the Evolution of the PRF from February 2008 until 30 September 2021 (see the Financial Statements[7] for further detail):

Table 8- EVOLUTION OF THE FUND: FEBRUARY 2008 – 30 SEPTEMBER 2021

In million(s) EUR	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	Sept. 2021
ASSETS
Investments at the beginning of the year (1)	57.82	56.43	91.48	113.35	119.59	175.29	208.25	236.32	270.83	308.89	345.40	343.48	430.21	474.68
Treasury Assets at the beginning of the year (2)	8.63	8.70	7.58	9.12	10.40	3.46	8.41	12.35	10.49	11.81	13.83	10.02	6.98	11.93
INCOME
Member state contributions (during the year)	32.00	39.82	41.10	41.95	46.83	45.70	45.21	46.47	49.55	50.93	50.74	56.05	60.76	47.99
Staff contributions (during the year)	11.20	11.75	14.31	14.35	14.27	13.80	13.64	14.21	14.55	15.56	14.89	15.38	19.47	14.41
EXPENSES
Benefit payments (during the year)	30.62	33.31	35.31	37.87	40.47	41.78	42.76	47.15	48.12	49.22	52.00	55.13	54.46	43.76
Administrative costs (during the year)	0.61	0.69	0.39	0.40	0.36	0.34	0.30	0.32	0.37	0.39	0.38	0.42	0.45	0.51
INVESTMENTS
Investments during the year	11.90	19.16	17.86	17.03	33.76	9.44	22.53	16.36	54.37	12.15	16.55	23.73	19.32	27.18
Realised and unrealised gains / losses (on Investments and Treasury) for the period (3)	-12.52	16.20	4.27	-9.73	23.86	24.27	16.05	19.11	23.48	24.92	-17.56	63.71	25.35	47.87

Note (1): Total net long-term Financial Assets, (including real estate deposits in 2008 and 2009) plus cash held in the current accounts belonging to the Investment Portfolio. Investments at 30 September 2021 amount to EUR 549.58 million.

Note (2): Treasury at end of year includes the bank account dedicated to pensions held at the Société Générale Strasbourg. Treasury Assets at 30 September 2021 amount to EUR 11.47 million.

Note (3): Net realised and unrealised gains/losses = net realised gains/losses on sales of Investments + adjustment of the Portfolio to Market Value at end of period + interest on deposits and late payments + net dividends + other Investment Income - net Management fees. The net losses in 2008 come from the unrealised loss at 31 December 2008 generated by the adjustment to Market Value of the Equity Allocation. In 2011, net realised losses of EUR 6.56 million were recorded coming from the shift from mandates to Mutual Funds in the Equity part, which absorbed the Investment Income of 2011 (EUR 3.41 million); and an unrealised loss of EUR 6.58 million was booked as the adjustment to Market Value of the Investment at 31 December 2011. In 2018, an unrealised loss of EUR 18.5 million resulted from the adjustment to fair value of the Portfolio at quoted market price at 31 December 2018.

IX. Activities of the Management Board

43.             Since the last report, the Management Board held two meetings, during which its members:

·      monitored the Fund Performance;

·      approved the Operating Budget for 2022-2023;

·      noted the Review of the Treasury Management in 2020 and Outlook for 2021;

·      noted the Financial Statements at 30 June 2021;

·      noted the Analysis of the Management Costs in 2020;

·      noted the Selection of the Infrastructure Fund Due Diligence Provider;

·       completed the Four-Year Review: Analysed the present situation for the Governance, Portfolio Structure, Administration, Investment Policy and Investment Strategy, and made an assessment of possible improvements. The Board will present the conclusions on such assessments to the Committee of Ministers in early 2022. Within the Four-Year Review, the Board:

o  noted the Global Contribution Rate Study;

o  met with the European Investment Fund for a possible Private Equity Allocation.

X. RECOMMENDATION

44.             In light of the preceding and in accordance with the provisions of the Resolution on the Statute of the Pension Reserve Fund, [Res(2006)1], the Management Board of the PRF invites the Committee of Ministers:

·       to take note of the information presented in this document.

ANNEX

PRF COMPOSITION AND RETURN

1.            Situation at 30 SEPTEMBER 2021

At 30 September 2021, the total Assets of the PRF amounted to EUR 561.06 million. The composition was as follows:

Source: Secretariat (based on SGSS data).

Note (1): Positions in short-term investments are held to complement the monthly transfer of staff and member state contributions serving to pay pension benefit and administration costs during the month.

2.            Return of the PRF from February 2008 to 30 September 2021

The figures provided hereafter for the Nominal Performance of the Investment Portfolio and its components serve to compare the Nominal Returns obtained by the Asset Managers to the Benchmark. They do not give an indication of the effective Nominal Returns achieved by the PRF.

2.1          PRF long-term Assets – Nominal Return on Investment Vehicles

Source: SGSS until end-2019; Aon thereafter.

Note (1): As defined in the PRF Investment Procedures: 45% MSCI World, 10% MSCI Emerging Markets, 23% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 12% Markit iBoxx Euro Corporates (bonds), 5% of the 5% Annual Performance Target for Real Estate and 5% of the Performance Target for Infrastructure (to be determined). As the Board decided that during the transition to the new SAA, the new Benchmark would gradually change alongside the execution of the shift, the current composition of the Benchmark is: 45% MSCI World, 10% MSCI Emerging Markets, 2.5% MSCI EMU, 24% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 13.5% Markit iBoxx Euro Corporates (bonds), and 5% of the 5% Annual Performance Target for Real Estate.

2.2          PRF long-term Assets – Nominal Return on Investment Vehicles since Inception of the current Strategy

Source: SGSS until end 2019; Aon thereafter.

Note (1): As defined in the PRF Investment Procedures: 45% MSCI World, 10% MSCI Emerging Markets, 23% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 12% Markit iBoxx Euro Corporates (bonds), 5% of the 5% Annual Performance Target for Real Estate and 5% of the Performance Target for Infrastructure (to be determined). As the Board decided that during the transition to the new SAA, the new Benchmark would gradually change alongside the execution of the shift; the current composition of the Benchmark is: 45% MSCI World, 10% MSCI Emerging Markets, 2.5% MSCI EMU, 24% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR), 13.5% Markit iBoxx Euro Corporates (bonds), and 5% of the 5% Annual Performance Target for Real Estate.

2.3          Nominal Return of PRF short-term Investments

Source: Secretariat and Morningstar for data on the short-term money market funds’ Average Annual Performance.

Note: The €STR (Euro Short-Term Rate) is the new Benchmark for interbank interest rates. It is calculated on the basis of interest rates obtained directly by the European Central Bank, and since 2 October 2019, it has gradually replaced the EONIA, which will be abandoned on 3 January 2022. Since October 2019, only the €STR has been published, the EONIA being calculated from this new reference rate plus a fixed spread set at +8.5 bps.

2.4          Nominal Return by Asset Class - Equity

Source: SGSS until end of 2019; Aon thereafter.

Note (1): As defined in the Investment Procedures: 81.82% MSCI World and 18.18% MSCI Emerging Markets. As the Board decided that during the transition to the new SAA, the new Benchmark would gradually change alongside the execution of the shift; the current composition of the Benchmark is: 78.26% MSCI World, 17.39% MSCI Emerging Markets and 4.35% MSCI EMU.

Note (2): Since 31 January 2008. The Amundi Strategy was invested through a mandate until 30 September 2011 and from then onwards through a mutual fund.

Note (3): Since 15 June 2011. Annualised performance of the Benchmark (MSCI EMU) over the period to 30 September 2021: 7.01%.

Note (4): At the end of each year, the Benchmark Valuation is carried out on the last working day of December, while the last Annual Valuation of the fund is performed on the preceding day. The resulting difference in Performance is offset by the Performance in January of the subsequent year. If the Benchmark and fund Performance were calculated on the same day, the fund would replicate the Performance of its Benchmark in December and January.

Note (5): As for the Amundi fund, a regularisation of rebates of EUR +152 000 was received in January 2017 and allocated to the overall Euro-area Equity Portfolio, contributing approximatively +0.5% to the Performance.

Note (6): The implementation of a full swing pricing mechanism for the Vanguard fund since October 2017 may result in a daily Performance Deviation between the fund and its Benchmark, up to a maximum of approximately +/-60 bps. The Swing Pricing Mechanism aims at protecting long-term Investors when calculating the daily NAV by making an Investor who is entering or exiting the fund pay for the costs that his/her transaction generates. Vanguard’s Policy evolved towards a partial Swing Pricing Mechanism as of 20 May 2019.

Note (7): Since 29 January 2016.

2.5          Nominal Return by Asset Class - Fixed income

Source: SGSS until 2019 included; Aon thereafter.

Note (1): As defined in the Investment Procedures: 65.71% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR) and 34.29% Markit iBoxx Euro Corporates All Maturities (Markit iBoxx Euro Corporates 3-5 years until 1 February 2016 and Markit iBoxx Euro Corporates All Maturities onwards). As the Board decided that during the transition to the new SAA, the new Benchmark would gradually change alongside the execution of the shift; the current composition of the Benchmark is: 64% ICE BofA Merrill Lynch Global Government Bond (hedged in EUR) and 36% Markit iBoxx Euro Corporates All Maturities.

Note (2): Since 31 January 2008.

Note (3): Since 31 May 2012. Annualised Performance of the Benchmark over the period to 30 September 2021: 3.16%.

Note (4): Until 15 March 2012: 100% Pioneer Obbligazionario Etico; from 15 March until 25 June 2012: Amundi Credit Euro ISR and Pioneer Obbligazionario Etico as per the respective weightings; from 25 June 2012 until 27 November 2014: Amundi Credit Euro ISR and BNP Parvest Sustainable Euro Corporate Bond as per the respective weightings; since 27 November 2014: 100% BNP Parvest Sustainable Euro Corporate Bond.

Note (5): In 2017, the last valuation of the fund was performed on 28 December and on 29 December for the Benchmark. This caused an unusual difference in Performance between the two. This difference was offset by the Performance of January 2018. With both Performance figures calculated at 29 December, the fund would exactly replicate the December and January Benchmark Performance. In this case, the Performance would be 0.02% versus 0.15% for the Benchmark in 2017 and 0.77% versus 0.88% in 2018.

Note (6): Since 7 May 2019.

Note (7): Since 31 January 2008 and until 21 May 2019.

Note (8): Until 21 May 2019.

2.6          Nominal Return by Asset Class – Alternative Investments

Source: SGSS until 2019 included; Aon thereafter.

Note (1): Since 30 April 2019.