1. Introduction to CERN Pension Fund and its investments

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

3. 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”

4. 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

5. 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”

6. 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

7. 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)

8. 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

9. 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

10. Founding Principles Solidarity Between couples and single people
Between people with children and without
Between high and low earners (C factor = …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)

11. CERN pensioners’ Rights
Acquired rights (art. III 1.02) (for members < )
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%)

12. 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:

13. 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

14. Questions?

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

16. 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

17. 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

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

19. 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

20. 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!

21. 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

22. 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

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

24. 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

25. 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

26. 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.

27. Thank you for
your attention!