Torben Moger Pedersen and Niels Fink of the Danish blue-collar workers pensions fund PensionSelskaberne talk to Fennell Betson
Denmark is in the process of building supertanker pension funds as second pillar provision through the industry-wide schemes gathers force. But theDanes may not yet fully realise the momentum behind these future bulk carriers of pension assets and the clear investment waters for manoeuvre they require.
The flotilla of industry-wide schemes launched in the last decade or so includes the PensionSelskaberne (PS), which looks after the general or blue-collar workers and covers around a third of a million contributors in four main schemes, including the construction sector.
The logistics involved are impressive. Director Torben Moger Pedersen of the Copenhagen-based PS says: All told we have 32,000 contributing companies, who have their contributions for their employees transferred into 340,000 individual accounts in the unique Danish-style of defined contribution (DC)." This is outsourced to a company operated by the ATP, which runs part of the state social security system.
"We are keen outsourcers," he adds. "Apart from administering the members' accounts, ATP also runs our accounts and we are outsourcing part of the fund management and the benefits payments as well." As the schemes cover those at the lowest level in the labour force, there is a lot of movement between employers. The sums of money involved may be relatively modest at this stage, but that will change fast. As investment director Niels Fink points out: "Our assets currently are around Dkr8bn ($1.2bn) and with new annual contributions of Dkr3bn and investment income our funds growth rate is around 50%." While there are some pension payments, this is a young scheme and the cash flow is very positive, he adds.
The main tasks for PS are liaising with the boards of the different schemes, and maintaining contact with the sponsoring organisations on the employer and trade union sides and managing the investments. Under the Danish DC system, there is not that much difference between an insurer providing the benefits and a pension fund.
The retirement benefits are paid as a guaranteed annuity, with only small entitlements disposed of as lump sums, says Fink.While the investment programme is constrained by the liabilities, the money is run as a group fund for each of the schemes. Moger Pedersen says: "As it happens, each of the funds is run on similar lines, but this is more by accident than anything else. There are boards heading each scheme, which are free to decide on their own investment guidelines." The boards set the asset allocation guidelines, PS implements these on a day-to-day basis. "Our allocations can in general be adjusted without selling assets," says Fink. "In fact, our asset allocation does vary through the year both in principle and practice. What has been happening since 1996 is that we have increased our equity allocations from 20 to 28%."
Moger Pedersen says that PS is different to other funds in Denmark in that 85% of the equities are invested in non-domestic markets, though probably these funds are now allocating their new money in similar proportions. The equities are run as a global portfolio with both domestic and non-domestic stocks in one segregated account mandated to Unibank. "We supply the benchmarks, indicating that certain percentages should be in, say, Europe, but the specific stockpicking and the decision when to use investment funds are matters left to Unibank," adds Fink. With no property and little need for cash, which is pouring in the door, the balance is virtually all in Danish bonds, half being in indexed bonds. "These are indexed mortgage bonds issued in connection with the social housing programmes," explains Moger Pedersen. "Strategically we take care of that in-house, but we have an adviser and have arranged with a manager to take care of the trades." Any exposure to property is obtained through equities. "Some of our equity holdings are real estate virtually," he points out.
"We are very plain vanilla equity and fixed interest investors," says Moger Pedersen unabashed.
No investment consultants are used - this not being the Danish way so far - but considerable time is spent in-house monitoring the performance against benchmarks. This then becomes the basis of the regular meetings with the investment managers. Longer term, the structure will be altered. "We are going to set up a structure, where we can handle a portfolio diversified between several managers, where internal control is good enough to know what is going on. We have a lot of work to do in that area," says Fink.
What employers expect is good returns from their contributions. Last year the returns were over 13%. "In 1993, when the main schemes started, contributions were at the very low level of 0.9% of wages, which has since been raised at each negotiation and is currently at 4.8% and due in some sectors to hit 5.7% this year." Says Fink: "In the public sector, which started out two years earlier, contributions have reached 12%, the likely maximum." While this is regarded as a benchmark for private schemes, this level may never be achieved, nonetheless contributions are likely to increase over the next few years.
In the face of this fast institutional savings growth, Fink argues: "It is imperative that we have the opportunity to invest more abroad." Currently, the rules limit investments to 20% in non-domestic assets and PS is almost at that limit. Clearly, if the EMU comes about these restrictions would fall by the wayside with the wider European oppoprtunities. But the Danes have said they will not be joining in the first wave, so this opening up may not occur for some time.But Moger Pedersen points to the facility funds have to invest up to 50% of assets into Ecu-denominated investments in addition to the 20% in non-domestic assets. This is of little interest at present, since only a limited range of Ecu bonds are available. "But if the Euro is substituted for the Ecu, then the limit would be virtually removed and funds would be able to do as they wished." The authorities have not yet indicated their intentions here. So far, the growth of institutional funds has not been a problem, says Fink. "But in future this money will have to go somewhere and if this Ecu-Euro opportunty is available then there is no problem."
But if not there are all the dangers of overheating the stockmarket over time and increasing the volatility of Danish equities, something that pension funds and other institutions are aware of in their increasing desire to diversify. However, it is a potential scenario that the authorities have not yet shown their willingness to address and so to keep their pensions supertankers steadily on course."