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IPE special report May 2018

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PKA generates 15.7% return on catastrophe bonds

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Danish labour-market pensions administrator PKA reported a 1.7% overall return on investments for 2015, down from the 10.9% it produced the year before.

But it said alternatives performed well, with catastrophe bonds generating 15.7%.

PKA, which runs three pension funds for employees in the healthcare and social-care sectors, said the 1.7% return was higher than the benchmark return, meaning its investment activities had in fact produced DKK5.6bn (€751m) more than the market average.

Members’ pension savings will be credited with 4.8% in account interest for 2016, in line with the 2015 level paid out.

Michael Nellemann Pedersen, investment director at PKA, said: “PKA is a robust pension fund, and that gives us the option of giving pensioners an extra boost.”

Alternatives performed well last year, PKA said, returning 7%.

It said it now had approximately DKK72bn invested in alternatives, a category that does not include emerging-markets debt or high-yield bonds.

Within this category, investments in catastrophe bonds returned 15.7%, the pension fund reported.

PKA has DKK10.2bn invested in catastrophe bonds, which are insurance-linked securities that transfer a specific set of risks from an insurer to investors.

The first catastrophe bonds were issued in the 1990s in the wake of Hurricane Andrew in the US in 1992.

PKA said its investments in offshore wind farms gave it a return of 7.2% last year, while property returned 7.5% and direct private equity generated 21.7%.

Over the last few years, alternatives have produced an average annual return of 7%, it said.

Nellemann Pedersen said PKA would continue its alternatives strategy in 2016 and gradually increase its allocation to this area.

“We expect to have 25% of our investments in alternatives in a few years’ time compared with 22% today, corresponding to an increase of DKK10bn,” he said.

He said the fund was taking the same stance with its real estate investment.

“Alternatives ensure stability in the portfolio also in those years when the returns on traditional investments in equities and bonds are modest,” he said.

The pension company’s global shares portfolio returned 4.8% in 2015, while the global bond portfolio produced a 1.2% return.

PKA said its administration costs per member had fallen by DKK50 per member in 2016 to DKK400 per member.

Over the last five years, these costs came down by 25%.

Member contributions rose to DKK7.5bn in 2015 from DKK7.3bn the year before.

Total assets rose to DKK235bn, up from around DKK215bn.

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