DENMARK - Danish pensions giant ATP is predicting, even at this early stage, pension funds could see negative returns on equity investment in 2008 as a result of slower growth and increased costs for companies.

Outlook commentary inside the pension provider's 2007 annual report reveals officials of the ATP supervisory and executive boards believe there is a "significant risk" overall equity returns will be negative for 2008, as "company earnings and equity prices will come under pressure as a result of the contagion effects of the financial crisis which took off in H2 2007".

More specifically, ATP predicts equity markets could be "exacerbated by slowing growth and increasing commodity prices" but bond markets may at least fare well to generate "positive, but modest, returns".

Within its results, ATP reveals the group's net profit reached DKK8.6bn (€1.15bn) in 2007, before bonus additions of DKK5.9bn, while the market return on its investment portfolio was 5.9% or DKK 21.3bn.

ATP recently moved to mark-to-market pricing, so changed its conditions for managing pensions assets to see assets divided between hedging and investment activities, but the firm is essentially split into three elements, the third being administration activities to other pension and social insurance schemes.

Following the division of assets into alpha and beta portfolios last year, ATP saw increased allocation to index-linked bonds into the "inflation risk" while "commodity risk" investments were also raised, as well as diversifying further into assets other than listed equities. (See earlier IPE story: ABP and ATP in €700m German real estate tie-up)

Highest returns for the investment portfolio were see on the "equity risk" - investing in domestic, listed overseas and private equity - to produce a DKK 9.4bn or 8.7% return, in part because "the domestic equity market, boasting a new double-digit price increase, was one of the high flyers of the developed markets", according to ATP.

That said, the "nominal interest rate risk" portfolio - which sees assets placed in global bonds, domestic mortgage and US mortgage bonds - raised a 5% or DKK 2.8bn return.

"Credit risk", where assets are held in high-yield fixed income and distressed debt, also delivered DKK414m or 2.2% while the "inflation risk" portfolio attained a return of DKK 3.1bn or 6.9% on investments in index-linked bonds, real estate, infrastructure and what it describes as an externally-managed diversified beta "All-Weather portfolio".

"Commodity risk", which means assets are invested only in oil-indexed bonds, generated or 25.6% return.

At the same time, an update to its mortality risk requirements also cost the firm a further DKK70m, while administration amounted to DKK35 for each ATP and DKK 26 for each SP client. (See earlier IPE story: ATP sees lower longevity funding)

ATP is the largest pension provider in Denmark, with €65bn in assets under management and 4.3 million members, as it also manages state pension assets, including those from the supplementary labour market pension scheme for disability pensions (SUPP).

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