PFA Pension is a life and pensions insurer that
focuses on providing corporate pension
schemes in Denmark. The insurer also
includes Laerernes Pension, which manages pension
schemes for teachers, covering more than
100,000 people.
A million Danes currently use one or more PFA
pension services, making it one of Denmark’s
largest life and pension companies, with total assets
of DKK 180bn (€24bn).
Four years ago, the PFA Pension was against the
ropes, sent reeling by unprecedented equity market
losses following the September 11 attack on
New York. As a result, it fell below the solvency
margin requirement and for a time stopped effecting
new corporate pension schemes.
Under a rapid restoration plan, it increased its
capital base by 20% with two subordinate loans
totalling DKK1.8bn. It also slashed its allocation
to equities from around a third of its investment
portfolio to a tenth.
Since then PFA Pension has returned to robust
health. In the first six months of this year PFA Pension
made a return on investments of 9.6%. Danish
equities in particular produced a yield of 24.9%
Few would blame PFA Pensions if it chose a
highly cautious or risk-averse investment policy
after the events of 2001. However, Hasse Jørgensen,
chief investment officer
of PFA Pensions says the PFA
has adopted an investment
approach best described
as ‘balanced’, given
the current conditions.
“As often happens,
we have
several parallel
objectives, or several
if you like. Objectives
and benchmarks
are important
but since we
have mark to market
on the liability
side as well as the
asset side of the
balance sheet, I
would say that net
return from the
balance sheet is the
most important
financial objective.”
The strategic benchmark is the first step to realising
these objectives, says Jørgensen. “The strategic
benchmark is selected based on a process of
optimising these objectives in different scenarios
for the future. Strategic asset allocation is the main
driver behind the development in investment
results and capital strength. Both of these are under
great scrutiny from us as well as from the market.”
To some extent the objectives of building capital
strength and seeking investment returns are
interdependent. Stronger reserves enable PFA
Pension to look for higher returns in the market.
The need to sustain PFA Pension’s reserves is paramount,
says Jørgensen. “The investment strategy
is driven by the risk tolerance combined with the
assessment of asset classes and markets in a longer
Yet investment strategy is bound to take
account of what is happening in the market.
“Investment strategy comes up for discussion
with the board as least once a year.”
The obvious major change to asset allocation
over the past four years has been a much lower allocation
to equities. In September 2001, allocation
to equities stood at 35%. This was reduced to 17%
by the end of the year and 11% by the following
Last year PFA Pension increased the percentage
of equities in the portfolio from 9.11% to
11.8% particularly towards the end of the
The strategic asset allocation for this
year is 12% for equities and the current
allocation is around 13%.
Jørgensen says that although the
equities share of the portfolio has
been increased there no likelihood
of a return to the levels of 2001.
“There have been incremental
additions to the equity portfolio
over the last three years and this
may continue for some time, but
we will not reach levels like 30%-
40% again.
The bulk of this year’s strategic
asset allocation - 79% - is to fixed
income. PFA Pension’s portfolio is
likely to be dominated by fixed income
for the foreseeable future, Jørgensen
says. “This is not least because of the mark
to market valuation of the liability side
using a yield-curve based on swap rates.”
Yet PFA Pension has made some significant
changes within the fixed
income portfolio. Last year it
increased the share of foreign
bonds, primarily
long European government
which are sensitive
to interest rate fluctuations.
By the end of
2004, foreign fixed
income’s share of the total portfolio was 26.5%
compared with 17.9% at the end of 2004. At the
same time PFA Pension reduced the percentage of
Danish bonds from 50.8% at the end of 2003 to
41.2% at the end of 2004. However, Danish bonds
remain an important component of the portfolio,
Jørgensen emphasises.
However, their share of the fixed income portfolio
is likely to diminish in time, he says. “The total
bond portfolio is becoming more diversified over
the years and the allocation to Danish bonds will
probably be reduced in relative terms.”
The improvement in the strength of the reserves
has encouraged PFA Pension to increase its exposure
to riskier assets. This has been done in a highly
controlled process, says Jørgensen. “We have for
some years now been moving slowly but steadily
into investment grade bonds, high yield bonds,
and emerging markets on the fixed income as well
as the equity side.”
Both high yield corporate debt and foreign equities
have performed in line with expectations in the
first half of 2005, he says.
Alternative assets offer more limited prospects
at the moment. PFA Pension’ exposure to
alternative investments - principally hedge
funds and private equity - is close to 1%. Jørgensen
says the contribution from alternatives is still relatively
insignificant. “It is a small exposure and even
though we are expanding it, it will not in the foreseeable
future have a great impact on the portfolio
As the markets have recovered, PFA Pensions has
provided its customers with various ways of gaining
greater exposure to equities if they choose.
One way is through PFA DitValg (PFA Your
Choice). This combines the security of a guarantee
with the possibility of a higher return from a
greater exposure to equities. Companies can
choose which of the seven PFA DitValg options
their pension scheme should include.
In options 1 to 4 there is the potential to gain a
higher return with a guarantee providing protection
against loss. The employees can then choose
the level of equities exposure they want – 10%,
20%, 30% or 40%.
In options 5 to 7 there is the possibility of having
a say in the choice of investments provided by PFA
Unit Linked. PFA Unit Linked was launched last
year to provide PFA customers with the option of
managing their pension schemes themselves.It
offers 11 internal funds and 22 externally managed
PFA Pension uses around 15 external managers
for the unit linked product, says Jørgensen.
The growing interest in investment choice and
a greater exposure to equities is part of PFA
Pension’s restoration to health. The capital base
of PFA Pension is secure, and currently exceeds
the solvency requirement by more that 70%.
PFA Pension is currently placed “very comfortably”
in the Danish Financial Supervisory Authority’s
‘traffic light’ stress scenario says Jørgensen
“There is a good distance to the yellow light, the
first warning.”
Jørgensen says this position will be maintained
“by creating a strong balance sheet not least based
on hedging away the risk of low interest rates in a
longer period of time”.
PFA Pension uses a number of ways to hedge
against interest rate fluctuations, says Jørgensen.
“First of all we use the fixed income portfolio for
hedging against fluctuations in the liabilities driven
by interest rate moves.
“Secondly we use financial instruments like CMS
floors [where the rate floor is a constant maturity_
swap] and receiver swaptions [where there is the
right but not the obligation to receive fixed and pay
floating rate in the underlying_swap]. This has been
a very important move over the last four years.”
The evidence is that PFA Pension is now in good
shape intends to remain that way.