The Danish FSA (Finanstilsynet) said it is launching an investigation into the pension sector’s ongoing valuation of alternative investments, with the funds having suffered investment losses in other asset classes so far this year because of the effects of the COVID-19 pandemic.
The financial watchdog called on the country’s pension funds to explain their valuation methods regarding real estate, private equity, infrastructure and illiquid credit investments, in a new probe it it said it was initiating due to recent large fluctuations in markets.
Carsten Brogaard, deputy director at the FSA, said: “It is important for the individual pension saver that the firms have processes and methods that ensure that the companies have fair ongoing valuations.”
Continuous reporting was a prerequisite for proper risk management within investment, he said, and would help avoid the risk of redistribution of assets between customers, for example when they entered and left the pension schemes, or when there was trading between customers within a company.
“The pension companies have had price losses on a number of financial assets this year, and so we are now launching an investigation to get an overview of how the firms have secured a continuous valuation at fair value of their alternative investments,” he said.
Back in March at the beginning of the Danish lockdown, the FSA made pension funds step up financial reporting in order to monitor developments in the sector, asking for information about solvency coverage on a weekly basis, including financial stress tests carried out by the firms.
At the end of March, Danica Pension received a number of official orders from the watchdog to improve the continuous valuations of parts of its alternatives portfolio, among other areas.
Many Danish pension funds have been lifting their allocations to alternatives in recent years in a bid to diversify their asset mixes as well as secure long-term secure income streams as long bond yields shrank.