The Danish financial regulator (FSA/Finanstilsynet) has reprimanded engineers’ pension fund ISP for being unable to calculate its solvency requirement, as well as a lack of skills among its directors.
ISP, the pension fund for technical and diploma-qualified engineers, responded by saying it had already decided to outsource most operational functions to commercial provider AP Pension, and that this arrangement would be in place in the second half of this year.
The labour-market pension fund, which manages DKK15.4bn of pension assets, announced the outsourcing deal in June last year.
Lars Bytoft, chairman of ISP’s supervisory board, said: “We at ISP have decided long ago that it will give us many advantages if we outsourced the majority of our activities to AP Pension.”
Being a smaller player in the pensions market is challenging, he said, particularly with increasingly stringent demands for pension funds.
“So one could say we have been prudent and have already taken account of this particular scenario, but the inspection just happened before everything was fully in place,” he said.
The FSA said that when it had inspected ISP in January 2014, the pension fund had been unable to calculate its individual solvency requirement according to the new rules.
In its report, the authority said: “In this context, the FSA considers it reprehensible that neither the supervisory board nor the management board was in possession of a clear enough basis for assessing whether proposed and implemented risk-reduction measures were sufficient to ensure compliance with the current solvency requirements in the transition to a new method.”
On the subject of ISP’s agreed cooperation with AP Pension, the FSA criticised the pension fund for failing to have a clear enough basis for making that agreement in the first place.
This meant the pension fund had put itself in a situation where it was unclear to what extent tasks would be solved within the framework of the agreement.
The FSA said it had told ISP back in January 2013 that the pension fund did not have adequate collective skills on its supervisory board.
It said it had now given the pension fund a risk notification because ISP had still not taken the necessary steps to strengthen collective skills on the board.
The pension fund was also reprimand for failing to take enough account of the differences in mortality rates for scheme members with guaranteed with-profits pensions and those with unit-link pensions.
Regarding investment practice, the FSA ordered ISP to set clear risk limits in relation to which asset types it may invest in, and about the extent to which interest-rate derivatives could be used.
“Furthermore, a reprimand was given on the setting of adequate guidelines on concentration risk,” the FSA said.
The authority said ISP’s average investment return for with-profits pension savings had been lower than those produced by comparable businesses over the last five years.
At the end of the first quarter, ISP had a capital requirement of DKK578m, the FSA said, and a solvency level of 1.31.
Bytoft said at no point had there been any risk to members’ savings.