For more information contact: emailus@marcusevans.com Philippe Desfossés delivered his presentation titled "Embracing an Enduring Investment Approach to Thrive in the Long Term" at the European Pensions & Investments Summit 2012. Join the 2015 Summit along with leading regional pension investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today. For more information contact: emailus@marcusevans.com

1. EPI Summit 2012
Embracing an enduring investment approach to
thrive in the long term
Sustainable growth / intergenerational fairness / Responsible investment
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 1

2. We did not accept to pay the right price for the
social security we enjoyed
Developed countries set up Social Security systems in a very
specific and favourable environment
Continued growth
Favourable demography
The environment has changed and is less favourable. Social
Security financing is not balanced
Financing gaps have been « covered » by debt
The « bill » is transferred to future generations
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 2

3. Something we are sure of : retirement is getting
more and more costly
We cannot live longer, keep the same length of working life pay the
same contributions, and get the same benefits
Something has to give
The way retirement benefits are managed is neutral in regard to
demographic constraints:
Retirement is always paid out of the National Revenue
It’ll always be people working and contributing who will pay for those who
are retired.
In 30 years
For fully funded schemes, their assets will be worth… what economic
agents working at that time, will be ready and able to pay to buy them,
For PAYG schemes, social contributions will be determined by the total
amount of the salaries paid to workers.
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 3

4. An inconvenient truth : most of the time
retirement schemes are « unfair »
Intergenerational equity and « sustainability »
The technical yield of a retirement scheme or « how much I get for
how much I contributed »
The notion of « Implicit life expectancy » or how long will it take
for my « recouping » my contributions.
Assuming an observed life expectancy of 25 years (after people have
retired at 62), how can we call a retirement scheme, in which, to
recoup your contributions, it takes :
40 years, or for an opposite situation
10 years.
If implicit life expectancy is lower than « observed » life
expectancy, what can we conclude?
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 4

5. Why is sustainability so at the core of all the big
issues we have to address
For a retirement scheme, « sustainability » means not to distribute benefits that
are paid by the « sacrifice » of the young contributors.
"Sustainable development is development that meets the needs of the present
without compromising the ability of future generations to meet their own
needs » . (Bruntland report 1987)
Being optimist, one can estimate it takes 50
years for an oak to grow
What % of the forestry can be harvested
every year?
What happens, if one harvests 10% of the
forestry every year?
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 5

6. Over optimistic assumptions and enduring investment ?
10 years
Liabilities have been “underpriced”
 Retirement benefits too generous
€1000
The higher the discount rate the
Discount rate :
cheaper the cost 7%
€ 484
What happens if the actual rate of
return is much lower than the discount
rate Investment return
rate : 3,5% € 684
If the actual return is 3,5% (vs. an expected return of
7%),
I am short by 200
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 6

7. Can you be responsible when you overestimate expected
returns?
Public Pension Funds (USA and UK)
Market Crash + Irrealistic assumptions = next bail out ?
California Public Employees’ Retirement System,
• expected rate of return of 7.75 percent* for the past nine years, and
8 percent before that,
* It has just been reduced to ….7,50%
• annual return during the decade from Dec. 31, 1998, to Dec. 31,
2008, has been 3.32 percent, and last year, when markets tanked, it
percent,
lost 27 percent (http://weblog.signonsandiego.com/weblogs/afb/archives/031711.html.)
http://weblog.signonsandiego.com/weblogs/afb/archives/031711.html.)
•
Is the solution to add more risk?
Discounting liabilities at too high a rate
No choice but search for high yield
High yield means high risks
At the end overoptimistic expected return may lead to lower rates of return.
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 7

8. What should not happen anymore?
SENATE THIRD READING
SB 400 (Ortiz)
As Amended July 15, 1999
Majority vote
SENATE VOTE :35-0
PUBLIC EMPLOYEES 7-0 APPROPRIATIONS 15-6
-----------------------------------------------------------------
|Ayes:|Correa, Briggs, Dutra,
| |Firebaugh, Honda, Knox,
|Ayes:|Migden, Cedillo, Davis,
| |Hertzberg, Kuehl,
|
|
CalPERS, however, believes they will be able to
|
|
|Pescetti
|
|
|
|Maldonado, Papan, Romero, |
|Keeley, Steinberg, |
mitigate this cost increase through continued
| | | |Thomson, Wesson, Wiggins, | excess returns of the CalPERS fund.
| | | |Wright, Aroner |
| | | | |
|-----+--------------------------+-----+--------------------------|
| | |Nays:|Brewer, Ackerman, |
| | | |Ashburn, Campbell, |
| | | |Runner, Zettel |
-----------------------------------------------------------------
SUMMARY : Makes various improvements in the benefits provided to
state and school members of the Public Employees' Retirement
System (CalPERS). Specifically, this bill :
Supporters further argue that:
1)The new retirement formulas provided by this bill mark the
first significant improvement in retirement benefits for most
state and school members' in approximately 30 years.
2)The increase in liability for these new benefits can be funded
by the excess retirement assets that have been generated
through investment income and changes in actuarial assumptions
resulting in no immediate increase in costs to the employer.
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 8

9. RAFP made 2 choices
To put intergenerational fairness at the core of its management
The advantages of the « Point system » (Régime en points)
A « pricing » deliberately prudent
The choice to invest according in the respect of its own SRI Charter
Values that coalesce the big issues that determine the passage towards sustainable
development
Why the Best in Class makes sense
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 9

10. From the cotisations to the pensions
How are rights acquired?
The contributions are declared annually by the employer and converted into
points.
The points earned by each beneficiary are based on the acquisition value,
which is set every year.
The total number of points acquired can be consulted on-line (www.rafp.fr).
Year 2005 2006 2007 2008 2009 2010
Acquisition value €1 €1.017 €1.03022 €1.03537 €1.04572 €1.05095
+1.70% +1.30% +0.50% +1% +0,50%
A capacity to acquire points growing steadily
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 10

11. From the cotisations to the pensions
How are benefits calculated?
The amount of the annual pension payment is calculated by multiplying the number of
points acquired by the service value, which is also set annually.
* The minimum retirement age has been reviewed.
Payments may only start after the age of 60*. The age at which it will be possible to retire –
with a discount – will increase to 62 years by 2018
The entitlement is paid out in annuities, unless the number of points acquired is too low .
Year 2005 2006 2007 2008 2009 2010
Service value €0.04 €0.0408 €0.04153 €0.04219 €0.04261 €0.04283
+2.00% +1.80% +1.60% +1% +0,5%
An increase of the service value above inflation
A technical yield just above 4% is consistent with an observed life
expectancy of 25 years
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 11

12. The founders of the Scheme defined a deliberately
prudent pricing
The “pricing” rate is prudent
1.34% (management fees included)
1.04% (ex management fees)
As the ECB aims at inflation rates of below, but close to 2% over the medium
term and taking into account a political « committment » to maintain the
purchasing power of the retirement pensions
The pricing rate in nominal terms equals 3,34%
This rate
Has sometimes been criticized for being “too” conservative
Nows it appears just prudent
Nominal rates in some countries are at historical lows
Greek default questions the very notion of a “riskless” asset €1,000
The return from the ERAFP portfolio has to be significantly higher than the
pricing rate, since:
 To be funded is not enough
 Some reserves have€to be booked (morbidity tables drift, external shock, operational
635
risk)
 An extra reserve to fund revalorisation of benefits.
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 12

13. ERAFP: a reasonable investor
Why can we say we invest soundly :
• our reserves are « ironclad »
 reserves have been calculated last year using a discount rate that can be qualified
as prudent : 1,7% (3,7% with a core inflation of 2% per year);
• our funding ratio is still high, since it remains close to 110 %, although
 all the capital losses on the stock portfolio have been taken into account,
 the impact of the Greek default has been booked;
• our SRI policy is consistent with the way we manage the liabilities side of our balance
sheet. As we invest for the very long term, sustainability is important.
Provision technique et provision non technique au 31/12/2008 (évaluations) en M€ Sensibilité de la provision au taux d'actualisation (100% pour
Taux de sur-couverture 6500
en m€ PNT au 31/12/2008 Provision technique (EG)
PT au 31/12/2008
1 2
, 0%
référence (1,8%) 131%
7 000
0,01% 2,9% 6,0% 9,2% 12,5%
12,5% 15,8% 19,2% 22,6% 26,1%
Taux de couverture (ED)
6 000
6000
122%
5 000
5500
4 000
113%
3 000
5000
2 000 104%
1 000
4500 95%
0
1,2% 1,3% 1,4% 1,5% 1,6% 1,7% 1,8% 1,9% 2,0% 2,1% 2,2% 2,3%
1,4% 1,5% 1,6% 1,7% 1,8% 1,9% 2,0% 2,1% 2,2%
taux d'actualisation taux
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 13

14. Are we nearing the end of a 30 years long journey and the
day of reckoning for some EMU members
Nominal interest of the 10 y French
Can we assume that the odds are even OAT
for:
• a 100bp decrease
• a 100 bp increase
Since its inception, the Euro zone has
benefited from a good environment…..
This has not encouraged investors
to exert all the required due diligence
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 14

15. For ERAFP, maximizing immediate profit is
detrimental to sound and sustainable business
ERAFP is a long term investor and…. should be a « contrarian »
Sound asset allocation and SRI best in class investment policy are
consistent
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
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16. Used to think for the long term, RAFP invests for the long
term
Net annual Cash Flows (M€)
Created in 2005, ERAFP is a mandatory, fully funded
pension fund for 4.6 million French civil servants :
the duration of our liabilities is particularly long
Based on civil servants’ remunerations, cash flow
projections are highly reliable
There is not hidden put option : members cannot cash
in their holdings before retirement.
We receive 1.7 Bn € in contributions per year:
Positive net cash flows remain above 1 Bn € per
year for more than 20 years Provisions du régime (en Md€)*
ERAFP has particularly low liquidity requirements
99
76
We can hold assets for a very long time without 51
needing to sell :
*Source : COR
27
We think long term,
9
1,5
We can invest for the long term.
2005 2010 2020 2030 2040 2050
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 16

17. The financial management of the scheme
How is the portfolio allocated?
Curent asset allocation and Asset allocation at 31/12/11
management
Limits defined by law
Real Estate
Corporates bonds
10%
(external managers)
Diversification Liquidity
9,4%
assets 4,1%
25% Equities (external
managers)
Bonds 19,3%
(min)
65% Supranational bonds
3,7% sovereign bonds
local authorities bonds 60,6%
• 65% minimum in bonds
• 90% minimum in euro denominated securities 3,0%
• 10% maximum in Real Estate
• 5% maximum in FCPR
• 5% maximum in securities issued by a single issuer (except
for Sovereign debt issued by an OECD member and CADES)
€11.4 billion in financiel assets at 31 December 2011
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 17

18. The financial management of the scheme
How will asset diversification progress?
2012 target strategic allocation
Target 2012 of asset allocation % of asset
Fixes income bonds 77%
of which convertible bonds 1,5%
International equities 21,0%
Multi asset 1%
Real estate 1%
Increased diversification of credit and international equities
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 18

19. For the RAFP it was clear from the very beginning that SRI
was consistent with its mission
RAFP puts intergenerational equity at the core of its governance.
The same point is used
To buy rights to a future benefit, when you’re working
To pay the benefits to the retirees.
The RAFP wants its investments to contribute to better the future not to
increase “our immediate wealth” at the expenses of our children and great
children.
Combination of
• very prudent monitoring of the scheme (low discount rate)
• the will to have some bearing on the economy in order
• to contribute to a change in the way we produce and
• make possible to preserve our common wealth : the Earth
Decision to adopt a global but not a radical SRI policy
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 19

20. What is at stake? Changing our investment process?
A new world is coming
What are the issues that no one should ignore?
• we are discovering that scarcity will very directly impact our lives
• externalities will be more and more internalized.
Can SRI remain?
• an overlay
• something that concerns just a marginal part of your assets or your funds
When an investor says he is doing some investment in SRI
what does it tell about the rest of its investment?
Why is it so difficult to change?
 Because most of our decisions do not take into account the long term,
 Because turkeys don’t vote for Chrismas.
« while the financial services industry performs many economically vital functions, and will continue to play
a large and important role in London’s economy, some financial activities which proliferated over the last ten years were
‘socially useless’, and some parts of the system were swollen beyond their optimal size ». Lord Turner
« In recent years, banks have chased short-term profits by introducing complex products of no real use to
short-
humanity’, and some parts of our industry have become overblown » Stephen Green, Chairman of the BBA
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
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21. A global and integrated SRI policy...
From inception in 2005, the Board of Trustees decided to implement a comprehensive SRI policy :
Which covers all asset classes and all assets
SRI is not just a small pocket in our assets
SRI is not just an investment strategy amongst others it is our investment strategy
Which applies a range of ESG criteria transversally
We believe this is more coherent than the addition of a lot of different theme funds
Which doesn’t exclude any sectors
We apply a best-in-class policy to all asset classes
We aim to make everyone have a motivation to make progress
What is the point of :
investing in a renewable energy fund if the rest of your equity portfolio is overweight in oil
companies ?
attacking a company for its collaboration with an authoritarian regime, if you buy the bonds of this
regime ?
excluding a polluting industry, if all the other companies you invest in rely on this industry ?
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 21

22. Best in class : the best way to be pragmatic and adapt to
asset class features ?
What would be the sense of investing just a fraction according to SRI principles ? What would it
tell of the rest of the investment ?
Best in Class make sense
What does ERAFP promote?
• a global but also a pragmatic approach - no sector bias
(we’ll need oil for a while),
• joining forces by exchanging so we can more
efficiently engage,
• convincing asset managers that they should integrate
SRI analysis in their investment process,
• developing indexes so other long term investors can
start investing in best in class SRI.
Some asset classes have specific features
• high unitary amount of the investment means interest
to pool together (infrastructure or RE),
• investment has to be assessed in its environment (for
real estate connection to urban transport)
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 22

23. A transversal approach : engagement
As Robert Urwin stressed investors responsibility: they should act like conscious
« universal owners »
For too long a time :
• institutional investors have been
consenting victims
• asset owners rights have not been
protected as they should have
• fidiciary duty did not extend to
shareholders’ rights protection
« Times there are a changing » :
• institutional investors talk to each The UK Stewardship Code produced by the Financial
other Reporting Council sets out good practice on the engagement
• asset owners want their rights to be of institutional investors with companies
taken care of 7 principles
• fidiciary duty evolves http://www.frc.org.uk/corporate/investorgovernance.cfm
• as a fallout of the crisis authorities
are pushing for a change
09/05/2012
Sustainable growth / intergenerational fairness / Responsible investment
www.rafp.fr 23

24. This time is different ???
Captain Speaking. Welcome aboard
Titanic 2, the first submarine liner
in the world.
Please relax and enjoy the journey.
We won’t find an iceberg in tropical
waters anyway! Ha, Ha, Ha….
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Sustainable growth / intergenerational fairness / Responsible investment
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