Management proposals towards restoring full funding of

the CERN Pension Fund

TREF4 NOVEMBER 2010

S. Lettow

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Characteristics of the CERN Pension Fund

• Capitalized defined benefit scheme, with 4 bn CHF in assets– 6000 members, including 3,000 active members– Pension indexation

• Directly placed under Council’s authority, DG not responsible for the Management of the Fund

• Managed by the Pension Fund bodies as per the rules and regulations

- in particular the Pension Fund Governing Board (PFGB), - the Chief Executive Officer (CEO) accountable to the

Governing Board, - operational autonomy within CERN.

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The problem of the CERN Pension Fund

1. Recent actuarial studies indicate that the Fund is experiencing a heavily negative cash flow, even when it reaches its ambitious actuarial return target of 5% per annum.

2. Assuming such a 5% p/a return, if no action is taken, the Fund will exhaust its assets within circa 30 years.

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3. Should the Fund’s future return keep pace with its historic return as achieved over the past 10 years, i.e. 2.1% p/a, it will exhaust its assets in 20 years.

4. However, if the Fund were to experience another loss similar to that of 2008, it would exhaust its assets over the following 10 years.

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Projected Pension Fund Assets

PFMU Can Only Delay Inevitable Default;Capital Preservation Must Become The Focus

PFMU Can Only Delay Inevitable Default;Capital Preservation Must Become The Focus

5. On 1 January 2010, the funding ratio stood at 67.9%. Although this is an improvement when compared with the 63.1% which prevailed at the end of the crisis year (2008), it is still far from full funding.

„Full funding“ being defined by the actuary as the market value of the Fund‘s assets at the balance sheet matching with the value of the Fund‘s liabilities at the same date.

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6. Which measures could be envisaged to restore full funding by 2033 latest?

a) Increasing contributions as a single measure would require

a total contribution rate of 45.6%. Inappropriate.

b) Increasing the return of the Fund as a single measure would require a target return of 6.65%. Risky hypothesis.

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Track record – long term performance

0.1%

9.0%8.1%

9.0%

-0.9%

4.3%

15.6%

8.3%

6.0%

13.0%

-0.4%

-3.4%

-5.6%

8.8%

5.6%

12.4%

9.0%

6.2%

12.5%

-19.3%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

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20 year average: 4.6%

10 year average: 2.1%

Fund Returns Have Lagged 5% Target for Past 10, and 20 YearsFund Returns Have Lagged 5% Target for Past 10, and 20 Years

2 year cumulative: (9.2)%

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c) Injecting fresh capital as a single measure would require a capital injection of about 1 BCHF. Unaffordable.

d) Under-indexing pensions as a single measure would require an increase of the ceiling from today 8% to 37%. Legal aspects.

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e) Reducing benefits as a single measure would lead to a benefit scheme which is disproportionate to the current contribution level of 30.88%. Inappropriate and not defendable.

Indeed, without our structural deficit of about 1 BCHF, the contribution level necessary to fund present benefits would stand at only 28.85%.

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Conclusion

We need a package of measures which allows us to restore full funding as soon as possible, and no later than 2033, without placing the whole burden on any single stakeholder: Member States; the Organizations; present and future members of the Fund; or, retirees.

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A. Proposals concerning current members of the Fund

Increase the total annual contribution rate by 3.12 percentage points, from 30.88% to 34%, as of 1 January 2011 of which the members of the Fund will have to bear one third.

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B. Proposals concerning future members of the Fund

Concertation on a possible new scheme for future members of the Fund suffered an initial delay due to the complexity of the issue.

Furthermore, some interesting ideas emerged in the course of the discussions, e.g. the introduction of a voluntary contribution scheme as a complement to a less favorable obligatory scheme for future members of the Fund.

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B. Proposals concerning future members of the Fund

However, to rush into a new scheme would be extremely unwise as any such modification to the present scheme needs to be cross-checked by the actuary on its short-, medium- and long term impact on the funding ratio.

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B. Proposals concerning future members of the Fund

Despite best efforts, this is not feasible before the last meeting of TREF this year.

In 2010, therefore, we decided to concentrate on measures concerning current members and beneficiaries of the Pension Fund.

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B. Proposals concerning future members of the Fund

For the new scheme, we now aim at a Council decision in June 2011, for implementation as of 1 January 2012.

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C. Proposals concerning current beneficiariesAs an extraordinary measure, no annual adjustment of pensions will be granted to recipients of a pension as at 31 December 2011 until their cumulated loss of purchasing power reaches 8%.

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D. Proposals concerning future beneficiaries

For those becoming recipients of a pension as from 1 January 2012, modified indexation arrangements are currently being devised for approval by the Council in June 2011 and implementation as from 1 January 2012.

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E. Proposals concerning the participating Organizations/Member States

The Organizations shall pay two thirds of the contribution increase from 30.88% to 34%, which amounts to an additional 10 MCHF per annum.

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E. Proposals concerning the participating Organizations/Member States

Until full funding is reached, which shall be no later than 2033, CERN shall pay special contributions of 60 MCHF per annum into the Pension Fund. These are incorporated in the Organisation’s medium-and long-term planning.

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E. Proposals concerning the participating Organizations/Member States

In application of the CERN-ESO Agreement, the CERN Council shall ask ESO to pay special contributions into the Pension Fund at a level to be determined by the Actuary (currently estimated at 3 MCHF per annum).

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CONCLUSIONTogether, these measures constitute a balanced and equitable package aimed at reaching full funding as soon as possible.

A first set of measures is ready for implementation as of 1 January 2011.

The second set of measures is currently under study and will be presented to Council in June 2011, for implementation as of 1 January 2012.

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