The Danish FSA has expressed its dismay at the way the country’s pensions sector adjusts the valuations of unlisted assets, saying the wide discrepancy between the valuations pension funds arrived at was “remarkable.”
Reporting on its investigation into pension funds’ alternatives valuations during the coronavirus-linked market crash earlier this year, the authority said today that it expected pension providers to be able to explain differences in valuations compared to listed markets.
Carsten Brogaard, deputy director of the Danish FSA (Finanstilsynet), said: “Value adjustments in the listed and unlisted markets do not necessarily have to be one-to-one, but it is remarkable that there are such large differences both between the individual pension companies and in relation to developments in the markets.”
The watchdog said it had found significant differences in the timing and size of pension companies’ value adjustments within alternative asset categories including private equity, credit, infrastructure and real estate in relation to the pandemic this year.
These asset categories made up around a fifth of the pension providers’ total investment assets at the end of 2019, it said.
In its report following up a fact-finding exercise initiated earlier this year, the FSA said the significant differences observed between adjustments the pension funds had made to the valuations of their private market assets compared to swings in the listed markets could be due to differences in their investment portfolios.
These could have different risk levels and exposure to COVID-19, it said.
However, the supervisor also said that companies’ different valuation processes and methods were part of the explanation for the discrepancies.
Focusing on the period when listed markets crashed between 9 March and 5 April, the FSA said the frequency of pension funds’ adjustments to their alternative assets ranged from daily to quarterly, depending on the asset category.
Pension funds under scrutiny in the investigation include ATP, LD Pensions as well as pension providers incorporated as life insurance companies and industry-wide pension funds.
“It is important for the individual pension saver that the companies value fairly. This is a prerequisite for good risk management, proper ongoing reporting of returns and to ensure against redistribution between customers,” Brogaard said.
In order to make sure things were fair, the regulator said it would increase focus on valuation processes, and whether these ensured adequate speed, frequency and size of adjustments in the event of changes in market conditions and risk.
Danish pensions and insurance lobby group Insurance & Pension Denmark (IPD) announced last month that it was working with pension fund members to create a model for industry guidelines aimed at achieving more transparency in the way they valued alternatives.