Introduction to CERN Pension Fund and its investments

Outline Pension schemes The CERN Pension fund Why a CERN PF? Structure and function Principles Benefits and contributions CERN Pension Fund Investments

Pension schemes (1) Members accumulate capital Capitalized scheme Budgetised scheme Members accumulate capital income = contributions + capital gain “capital investment management” Payments are made from the cash-flow income = contributions “contract between generations”

Pension schemes (2) Defined Contribution The total amount of contributions paid into the scheme at the moment of retirement determines the benefits paid out. It acts like a savings account: “Contributions are predictable” - Pension level depends on performance of investment portfolio - The staff member shoulders all the risk Defined Benefits The level of benefits is defined upfront and the contributions are calculated to insure that the Fund will be able to pay them: “Pensions are predictable” - Risk shared between staff member and sponsor

CERN Pension Fund CERN PF is based on a defined-benefit scheme Level of pension depends on member’s: last salary/last 3 years positions number of years of membership age (reduction factors below age of retirement) CERN PF is a capitalized scheme Funded by contributions & return on investments No legal obligation to reach full funding, but … Council decision following new governance in 2007: “the Fund must be fully funded”

Why a CERN Pension Fund? CERN is an International Organisation (State + employer): Must be independent of individual Member States’ legislation Must guarantee equal treatment between all staff members, independently of their home country. This applies in particular to the pension rights Must provide a social insurance scheme for its staff since they are no longer covered by their national scheme

Structure and Function Legal status (art. I 2.01) CERN PF is integral part of CERN Under supreme authority of CERN Council  Administration + management independent of CERN/ESO Assets (art. I 2.02, I 2.03) Deposited and held in fund separately from CERN/ESO To be used exclusively for paying benefits to PF members Bodies (art. I 2.04) Governing Board Investment Committee/Actuarial Technical Committee Administrator (also called CEO)

Governing Board Functions (art. I 2.05), amongst others: Apply policy of CERN Council Supervise and monitor management of Fund Define investment policy of assets Submit proposals/opinions to Council and FC concerning PF Composition (art. I 2.06, since 1 Nov. 2007) Mandate ≤ 6 yrs Two nominated by CERN Council One nominated by ESO Council Employer reps. One nominated by DG of CERN Two nominated by CERN Staff Association One nominated by ESO Staff Association Employee reps. One nominated by CERN/ESO pensioners Two professional experts nominated by CERN Council

Resources and Guarantee Resources of the Fund (art. I 3.01) Contributions Organizations (CERN+ESO) Contribution members (CERN + ESO) Income investment assets Gifts + legacies Guarantee of benefits (art. I 3.03) Respective Organizations as long as they exist Dissolution of CERN: Creation of Foundation under Swiss law to guarantee the rights acquired at date of dissolution Implement steps for integration into national social security schemes of MS which guarantee equivalence

Founding Principles Solidarity Between couples and single people Between people with children and without Between high and low earners (C factor = 1.3416…1.2059) Between all members and beneficiaries Mutual insurance Risks shared by all members of the scheme to ensure that everybody is entitled to the right benefits Equality of treatment Men and women have equal rights (surviving spouse pension, retirement age)

CERN pensioners’ Rights Acquired rights (art. III 1.02) (for members < 01.01.12) Right of benefits applicable to those to which staff was subject before introduction of new rules, or, to new rules if they are more favourable Protection beneficiaries’ purchasing power (art. II 1.14) Until 2005: ad hoc adjustments for inflation (full or partial) granted to retirees Since 2006: Geneva consumer price index multiplied by factor taking into account funding ratio of the Fund  method defined in Annex C (maximum individual loss 8%)

Benefits (1) Retirement pension (art. II 2.01, 2.02) 2% (1.85% for new staff since 2012) per year of service, max. 70% of last reference salary (last 3 years’ position), times C factor (Annex A) Anticipated retirement pension (art. II 2.04, 2.05): age ≥ 50  reduction factor:

Benefits (2) Transfer value (art. II 1.12) allows transfer of (part of) accumulated sums paid into CERN PF to another scheme (obligatory for < 5yrs of service) Deferred Pension (art. II 2.03) Disability Pension (section II 3) Pension for Surviving Spouse (section II 5) 55% of full pension (less if large age difference, etc.) Orphans’ Pension (section II 6) Allowances (section II 7, annex B) family, dependent child, fixed sum for surviving spouse

Questions?

Pension Fund Investments Full Funding PF investment policy Why a special contribution is needed?

Full Funding Definition: - able to cover all liabilities (5’500 MCHF) - at any moment in time CERN PF total assets August 2014: 4’100 MCHF Immediate full funding achieved only by a rapid injection of capital into the Fund: +1’400 MCHF

How to achieve Full Funding over time Could be done by: reducing PF outflow with changes - in benefits of beneficiaries - in benefits of current Fund members - affecting future Fund members (present + new scheme) increasing PF intake with higher contributions special contributions financial return on assets

PF Investment Mandate Achieve the actuarial return objective of 3% above inflation with the lowest possible level of risk at all times CAPITAL PRESERVATION

Investment Opportunities Emerging Markets Derivatives Markets Emerging Markets Derivatives Markets Switzerland Global USD Equities Commodities Eurozone Corporate Bonds Alternatives Emerging Markets Gov’t Bonds Switzerland Real Estate CH Cash EU EU Private Equity US ASSET CLASS

Investment Characteristics Asset Class Expected return Largest drawdown (10 Years) Observations 5 Years Post Crisis Cash USD/EUR/CHF 0-1% 3% 0% Currency risk, except for CHF Government’Bonds Switzerland 5% -4% Yields at historical lows & illiquid market Eurozone (AAA) Eurozone (others) 1% 4% 6% -7% -15 to -80% Negative exp. Returns and limited upside Emerging Markets 8% -29% Corporate Bonds Derivative Markets 2% -12% Interesting opportunities Equities -54% Huge downside risk 7% -62% Real Estate Highly illiquid EU -10% Alternatives Diversified portfolio -8% Manager selection is key Private Equity US - EU 9% -25% Commodities GSCI -68% Inflation protection There is no easy solution: challenge consists in determining a Strategic Allocation which meets the Return Objective while minimizing the Risk of Losses!

Strategic Allocation Example Detailed ALLOCATIONS August 2014 Bonds + Equity indices (no cash option) Market Risk Bonds + Equities (with the option to go in cash ) Target is to Take As Little Market Risk As Needed to Achieve the Mandate Absolute return strategies (Real Estate, Alternative, Commodities, Private equity) Cash

How we choose the Strategic Allocation Monitor & Control Natural Strategic Asset Allocation Annual risk limit Implementation & Dynamic Allocation Approved by the PFGB Calculated by Risk Consultant and approved by the PFIC Conducted by the PFIC, with support of Risk Consultant Conducted by PFMU following guidelines approved by the PFIC Disciplined Process Which Puts Risk Control First

Investments met the objective? August 2014: +3.8 % YTD (inflation ~ 0%)

Fully funded CERN Pension Fund contribution Return on investment Staff contribution +165 MCHF/y +110 MCHF/y +55 MCHF/y 100% 75% 50% 5’500 MCHF 25% -315 MCHF/y Pension Fund Assets 0% Paid pensions

Why a special contribution is needed CERN contribution Return on investment +63 MCHF/y Staff contribution +120 MCHF/y +110 MCHF/y +55 MCHF/y 100% -30 MCHF 75% 50% 4’100 MCHF 25% -315 MCHF/y Pension Fund Assets 0% Paid pensions

Investments Conclusions CERN Pension Fund applies an investment strategy that focuses on risk management. Capital preservation strategy is designed to be able to meet the return objectives with the lowest possible risk. Investment process is led and monitored by the PFIC/PFGB together with an independent external risk consultant. Even if we met the return objectives, the special contribution is needed to avoid to increase the deficit.

Thank you for your attention!