Declining equity markets have caused serious problems among some of the largest pension schemes in Denmark. In recent years, the Danish pension fund industry, which joined the equity culture late, has considerably increased its exposure to stocks. Capital losses in some pension funds have been considerable.
In September, insurance group PFA announced losses of around DKr18.2bn (e2.4bn) affecting the group’s bonus reserves and forcing its pensions division into emergency talks with the Danish Financial Supervisory Authority to draw up a plan to secure the savings of its customers.
Danish equities have fallen by 24%, with 12% of the drop coming after 10 September. PFA has commented that the losses are so serious that it is no longer able to comply with the capital requirements under Danish law.
PFA’s losses and those of its main competitors, Trygg-Baltica and Danica, have marked a new period in the Danish pension market, which needs now to restructure itself to keep the business going.
The Danish Financial Supervisory Authority has made very clear in the recent past its intentions to closely monitor insurance company and pension fund investments and has developed a ‘traffic light’ system under which these institutions are in a green, yellow or red light zone according to the schemes’ ability to meet the interest guarantees required by law. These guarantees ensure the companies achieve a prescribed average return after tax to meet future obligations.
“Regulators are now tougher and demand more information from pension funds,” says Steen Villemoes, Nordic representative at Altius Associates in Copenhagen. “If you are in a so called ‘yellow light’ zone it means a warning signal, as you then do not have sufficient reserves to absorb a loss of 30% on your equities and 12% on your property investments together with an interest decline of 1%.” If a pension funds moves into the ‘red light’ zone the figures are 12% equities, 8% for property and an interest rate drop of 0.75%. In red light you have to notify the regulators and inform on what measures and actions you will implement to improve your situation.”
So, with some institutions under yellow light, the concern now is that the system with relatively high guaranteed rates might push institutions away from equities at the wrong time.
“This system has been under increasing debate,” says Villemoes. “Pension funds were building up their exposure to equity that a year ago was around 35–45%. The plans were typically to increase this to 50% or even more, but the performance of the market and the legal requirements are making things change. Even if some pension funds would like to increase their exposure to equities but they can’t do it today”
At T Rowe Price, director of Nordic institutional sales Flemming Madsen comments: “ We haven’t seen any dramatic changes in asset allocation, and I think is unlikely that we’ll see them in the near future. Unless they are forced by the regulator.”
Also, legislation recently came into force changing taxation on capital gains for pension fund assets. Taxation on equity investments went up from 5% to 15%, and on fixed income it was reduced from 26% to 15%. “As a consequence of this, pension funds have started looking at taking on more risk in their fixed income area to enhance returns,” says Madsen. “So instead of going first into high quality corporate bonds, many institutions have opted for high yield exposure to maximise returns.”
With long experience of high yield sector management, Madsen sees this as a great opportunity for T Rowe Price in the Danish market. “There is a very strong demand for global high yield and other specialist products and this is what we are focusing on.”
Also Madsen highlights that European investors, and in particular Nordic institutions, are also getting use to the concept of investment style.
At Altius, Villemoes agrees on the search for investment alternatives among Danish institutional investors. “One or two years ago institutions were still looking to increase their overall equity exposure with the focus on internationalisation of their portfolios. At the same time high yield and alternatives like private equity and, up to some extent hedge funds, entered the debate,” he says. “Most institutions in Denmark have decided to allocate around 3–5% of total assets into private equity, with a few investors going up to 10%,” he says.
A good example of this is ATP, Denmark’s supplementary first pillar pension plan, that is planning to invest some e3bn into private equity, which would make it into one of Europe’s largest pension investors in this asset class.
“Some of the institutions that have made the decision of including private equity in their portfolios are now in stand by, and the actual investments in this asset class might be delayed for a quarter or two. But it will happen,” says Villemoes.
Hedge funds have also been in demand. Some point out that institutional investors are concentrating too much on local providers of this asset class instead looking at the big international houses. With not too many domestic hedge fund managers and too many investors willing to put money into this asset class, there are concerns about possible disappointing surprises in the near future.
But alternatives are here to stay and future exposure to this type of investments could be larger here than in other European countries.
“We have started investing in high yield products and private equity and exposure to this asset classes will grow in the near future,” says Torben Möger Pedersen, managing director at Copenhagen-based PensionSelskaberne, which manages six pension funds covering 400,000 blue-collar workers in the private sector. “We have around DKr25bn under management and the portfolio is split 50/50 into bonds and equities. But in five years will double and we are now focus on restructuring our asset allocation to include 30% fixed income investments, 50% global equities and 15% in alternatives,” he says. “Both alternative investments and risk control our two of our main fous for the future, and we are trying to improve asset allocation by introducing investment vehicles that could bring diversification into our portfolio.”
And if the interest in alternative asset classes is a fact among Danes, the search is also on for alternative stocks within traditional asset classes. Bankinvest is to launch a fund aimed to institutional investors investing in alternative energy companies, which is attracting the interest of pension funds. “We are specialists in international equity and, until recent events, the shift in the market has been clearly from bonds to equity and, in particular, to international stocks,” says Daniel Broby, chief investment officer at Bankinvest in Copenhagen with asset under management of e4.3bn. “Many of our competitors are focusing on the short-term concerns of pension funds but we are looking at the future. We are in the process of launching a fund that will focus on renewable energy sources, rather than fossil fuels by alternative solutions, and the companies providing those solutions will became leaders in the markets.” Although the environmental links that this initiative has will attract investors with sensibility towards SRI policies, the reality is that this is a growth sector as not many others, and SRI connotations aside, it could provide pension funds with an excellent solution to match long term liabilities. Along with investment bank Carnegie, Bankinvest has developed one of the world’s first alternative energy index, and they believe the opportunities in this field are significant.
The months to come will witness how those schemes that got into trouble try to stabilise their situation and if the answer is to move away from equity holdings. For those who don’t have the guarantee rate requirement, the next year will see the consolidation of more diversify portfolios and increase use of alternatives.
Local asset managers and insurance companies have gone through a difficult year that up to some extent have benefited international houses that can provide specialist products to improve diversification. “In terms of products the next year will bring more demand for global high yield vehicles,” says T Rowe Price’s Madsen. “On the equities side, some pension funds are making changes in asset allocation and we see opportunities in the US small and mid-cap sector.”
In terms of the pension market itself, the assets under management are set to grow, but not new schemes are likely to be created. “By one type of scheme or another the market is pretty well covered but still very young, so it will grow according to contributions,” says Altius’ Villemoes. “There is still room for some consolidation among institutions, but I don’t see many new pension plans being established.”

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