The package of proposed changes to ATP’s business model unveiled last week are “too little, too late”, according to one financial expert, while another approves of the Danish statutory pension giant’s main ideas – but still doubts they will turn out to be enough to solve its problem.
The DKK936bn (€126bn) pension fund – Europe’s fourth largest – last week briefed the media on a complex reform to the way its guaranteed ATP Lifelong Pension scheme works, explaining what is the main element in a lengthy legislative proposal put out for consultation by the Ministry of Employment.
Bo Foged, ATP’s chief executive officer, said sticking with the status quo was not an option because negative interest rates, increasing life expectancy and a contribution rate that had not risen since 2016 had challenged ATP’s “long-term relevance”.
The plan now up for debate is to redirect a fifth of new contributions to a new diversified, multi-asset portfolio instead of to the bonds-and-swaps hedging portfolio.
At the same time, a proportion of low-yield assets is to be freed up immediately for investment into riskier, higher-return investments by adding an illiquidity premium to the discount yield curve – which will shrink the book value of ATP’s pension liabilities.
CBS professor Jesper Rangvid – a prominent critic of ATP’s current business model – described the proposed reform as a shift away from the pension fund’s current 80/20 approach, where 80% of assets are tied up in very low risk assets backing guarantees and 20% invested more freely to target higher returns.
“The main part of the proposal is a move to a 60/40 split for people not yet in retirement, i.e. younger generations,” he told IPE.
In terms of contributions, ATP has presented the change as a continuation of the 80/20 split, albeit with a quarter of the “guarantee contribution” changing to “market contribution” in future.
However Rangvid argued that since this market contribution will be invested in risky assets, i.e. not going to the hedging portfolio, the new model will in investment terms effectively be a 60/40 model.
The two main ideas of the reform – the change in the way future contributions will be invested, and the addition of the illiquidity premium to ATP’s discount yield curve to reduce the value of liabilities – are good, according to Rangvid.
“I like both of these ideas. Allocating less to something that doesn’t yield a positive return is good and makes an enormous amount of sense, and both of these changes will help ATP fulfil their goal of having at least 0% real returns,” he said.
But Rangvid said he was not certain the proposed new business model would prove sufficient to solve ATP’s problems.
“I have to say, I’m still in doubt whether these changes will be enough to generate a return that at least covers inflation,” he said, adding: “I’m also still a bit puzzled about why ATP hasn’t provided any numbers on this.”
“I have to say, I’m still in doubt whether these changes will be enough to generate a return that at least covers inflation”
Jesper Rangvid, CBS professor
Meanwhile, independent consultant Per Linnemann said the changes being made to ATP’s pension design are, and probably will be, a stop-gap solution.
“While it’s a big step for ATP, it’s a small step for the members,” he said in comments to Danish news service InsideBusiness.
“It’s too little too late. But neither the media nor the public know it, because they are not getting the necessary consumer information,” said Linnemann, a former chief actuary at the Danish FSA.
He said in the UK, politicians had rejected a requirement for people to buy guaranteed annuities with their pension savings, in part because it did not make sense when interest rates were so low.
“You simply pay too much money for a guaranteed pension in a low-interest environment,” Linnemann said.
The ATP pension scheme was very capital-intensive, he said, with 20% of members’ contributions going to a large collective buffer for it to work. This meant that from the start, members only got a pension on 80% of their contributions, whereas a move to 100% alone would make their pension 25% larger, Linnemann said, in reported comments confirmed to IPE.
He cited two reasons why ATP’s collective buffer had to be maintained at a significant level – even under the proposed new business model.
Firstly, it could be needed to cover potential big losses taken by the leveraged investment portfolio – as he said was the case in the first quarter of 2020 when that portfolio ended with a DKK29bn investment loss.
Secondly, pension rights deriving from 80% of the members’ contributions still had to be guaranteed from the time of payment in relation to future development in life expectancy.
“However, predicting the development in mortality and longevity far into the future carries great uncertainty with it,” Linnemann said.
“It can also have the unfortunate effect of too much money being withheld, which could otherwise have been used to increase members’ pensions, if the development of future life expectancy is overestimated,” he said.
Governed by its own act of parliament, ATP has a special position in the internationally-applauded Danish pension system, and one that has arguably been changing over the last few decades as the Nordic country’s system of second-pillar labour-market pension schemes has matured.
The pension provided by ATP – which stands for Arbejdsmarkedets Tillægspension (Labour-market supplementary pension) – is a first-pillar scheme covering nearly all Danes and designed to be a lifelong supplement to the state pension.
Some in the Danish pensions industry argue that money saved in ATP’s scheme would produce higher returns if directed into second or third-pillar pension schemes.
ATP emphasises the importance of its flagship pension scheme for the poorest people, as well as the far broader coverage it has than the labour-market schemes.
Last week, Foged said the pension scheme represented 10% of income for the 20% of people with the lowest pension incomes, and that 90% of Denmark’s 18-64 year olds paid into ATP – compared to the 65% who contributed labour-market pension schemes.