The deep losses suffered by Denmark’s statutory pensions giant ATP this year are the latest example of how dangerous leverage can be for pension funds, according to a prominent Danish economist and commentator who is calling the scheme’s whole model into question.
Jesper Rangvid, professor in Copenhagen Business School’s (CBS) Department of Finance, said: “I think we need a thorough discussion of the role of ATP in the Danish pension system, and the type of pensions they aim for.”
Yesterday, ATP reported results for the first nine months of this year, showing that its return-seeking investment portfolio – which consists of the bonus potential and is geared by borrowing from the much larger bond-based hedging portfolio – had racked up a loss of 45.2% so far in 2022.
The year-to-date loss on that now DKK94.2bn portfolio had expanded from 36.4% at the end of June.
Rangvid said of ATP’s losses this year: “This is a second recent example that leverage in pension funds can be dangerous.”
The turmoil in recent weeks around UK pension funds’ LDI portfolios had already demonstrated this, he said.
“We now see something similar at ATP which also gears its investments,” he said.
However, ATP’s chief executive officer Martin Præstegaard said in yesterday’s report that ATP’s most important task was to be able to pay the pensions it had promised members, regardless of market developments, and that despite the losses it could still do that.
“That guarantee is an important characteristic of the ATP pension, and the guarantee in itself is presumably even more valuable at a time when many pensioners in Denmark are seeing their other pension payouts decreasing,” he said.
But Rangvid told IPE a debate was needed on whether ATP pensions should be guaranteed or not.
“Now it is somewhere in between, which results in a very high degree of risk-taking in the investment portfolio. Is this the best way to do this? I think the experiences this year call for a thorough debate on this,” he said.
The CBS professor said: “We have argued for a few years that ATP takes a lot of risk in their investment portfolio. We now we see how frighteningly correct our predictions were.”
The risk was that returns were extra high when times were good, and extra low when times were bad, he said.
“During the good times in the past couple of years, ATP did very well and generated very high returns,” Rangvid said, adding: “Now that times are bad, ATP is doing horribly, generating huge losses.”
Losing 45% in nine months really was bad, he said.
“We need to discuss what you want,” he said. “If you run a guaranteed scheme, there are some advantages and disadvantages, and if you run a non-guaranteed scheme, there are other advantages and disadvantages.
“We have never had that thorough discussion – instead, ATP migrated to a hybrid model,” said Rangvid, adding that the deep losses seen now called for just such a discussion.
At the beginning of 2021, ATP announced a change to its business model, adding a new product for new contributions from members with more than 15 years to pension age involving a fifth of that money being labelled “market contribution with higher risk” and channelled into a portfolio with slightly higher risk than the main guaranteed annuity product.
The new model took effect at the beginning of this year.