France's FRR halts equity, illiquid increases amid coronavirus

Paris-based Fonds de Reserve pour les Retraites hit the pause button on planned equity and illiquid asset increases after the coronavirus outbreak postponed France's latest pension reform.

The reform, which was delayed in March by French President Emmanuel Macron, was set to extend the €33.6 billion ($36.7 billion) plan's investment horizon to 2040 from 2024. It would also have given FRR greater flexibility to invest in growth assets such as equities, real estate and infrastructure, Olivier Rousseau, executive director of FRR, said in a telephone interview.

"The move of the portfolio toward more risk assets is delayed," Mr. Rousseau said. "No changes to the portfolio are a big change to what was supposed to happen," he added.

Executives in January planned on adding 10 to 15 percentage points in global equity exposure, Mr. Rousseau said. FRR's current equity allocation, which has a eurozone bias, accounts for about 36% of the plan's total assets, while real estate currently stands at 0.5% of total assets. He did not specify the size of the planned increase to real estate.

"We want to have an agreement from the Ministry of Finance before we make any substantial changes," he said, adding that the government's latest position on the reform's timeline is currently unclear. "I hope the discussion will be able to start again in September or October," Mr. Rousseau said.

The planned changes to the fund's investment horizon were necessary, Mr. Rousseau said, because the short-term view has constrained FRR's exposure to illiquid assets. "We (can't) invest in infrastructure. It has also reduced our risk-taking capability in equities," he said.

The increases in equity and real estate allocation are expected to come at the expense of investment-grade bonds, which currently constitute about 50% of FRR's portfolio. About 13% of total assets is invested in French government bonds.

Mr. Rousseau said FRR would have been targeting a diversified global equity exposure including emerging markets had the reform not been postponed. FRR currently invests about 6% of its total assets in emerging markets equities. He did not specify any additional allocation.

"It would (have been) ideal to make investments in the last two weeks," he said, adding that without authorization the fund can only watch markets.

On the investment outlook for the global economy, Mr. Rousseau said: "We are in a deep recession. If a country gets a 5% (contraction to the economy), then it would have done well," he said. "We will see over 10% recessions."

In March, France canceled its budget program, which would have seen an overhaul of the retirement system. As well as scrapping the planned reform, the French government announced an emergency budget, pledging €345 billion to combat the effects of the virus on the economy.

Other changes under the reform would have raised the retirement age to 64 from 62.

Bloomberg contributed to this article.