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ATP eschews backup plan for failure of euro-krone peg

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Denmark’s ATP has no contingency plan to resort to should the krone’s peg to the euro fail to hold, despite market turmoil, as it has “full and firm confidence” the country’s central bank will win the battle. 

ATP’s chief executive Carsten Stendevad told IPE: “We have full and firm confidence in the peg – it is the centre point of the Danish economic policy, and it has been for several decades.”

The DKK823bn (€110.5bn) statutory pension fund had no contingency plans ready for the eventuality that the Danish krone’s peg to the euro could break, he said.

“We all have an interest in the peg holding,” he said. “Thankfully, we have a central bank with a clear mandate, instruments at its disposal and a strong will to maintain our 30-year policy.”

The Danish central bank said this week it had spent DKK106bn intervening in the currency markets in January – a record high since Denmark first pegged its currency to the euro.

The Danish currency has been pushed higher on the foreign exchanges particularly since the European Central Bank (ECB) announced a fortnight ago it would start large-scale quantitative easing (QE) to boost economic growth in the euro-zone.

At the end of last week, the Danish Ministry of Finance decided to stop bond issuance until further notice, at the central bank’s recommendation, in a bid to limit the inflow of foreign exchange.

However, Stendevad said the current market situation was very challenging for ATP.

“We have absolute-return targets that are quite ambitious, and it’s a uphill battle,” he said.

Yields on 30-year Danish government bonds fell last year to around 1.4% from about 2.7% at the start of the year.

“Bond yields have fallen, and we are in the business of providing guaranteed pension incomes, so, when interest rates drop, it becomes much harder to provide these future incomes,” Stendevad said.

The pension fund produced a return of 23% in 2014 including DKK132bn from its huge hedge portfolio and around DKK6bn in its smaller return-seeking portfolio, he said.

“What that story doesn’t tell is that our liabilities have increased dramatically, so that return was needed just so we could meet those,” he said.

“The story continues in 2015, when it has become even more difficult to meet our liabilities. But, thankfully, we have our hedge portfolio, which protects our annuities.”

ATP has weathered the difficult market situation well though, he said, and is overfunded with a solvency ratio of 115%.

“Despite the massive falls in interest rates, that shows our guarantees are very well protected,” he said, adding that the institution had even increased pensions by 1.5% for 2015.

Over the last 4-5 years, the return-seeking portfolio has changed significantly, he said, particularly regarding its investment in property and infrastructure.

“The purpose is to produce a return that enables us to increase pensions,” he said.

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