Denmark’s financial watchdog has said that although the country’s pension providers are developing their processes for valuing alternative assets, there is further to go and it will focus on this issue particularly in future inspections.

Recent analysis by independent adviser Nikolaj Holdt Mikkelsen revealing wide differences in a range of pension providers’ stated returns for private equity during most or all of 2022, has provoked comment on how pension funds may be valuing their unlisted assets.

According to Holdt Mikkelsen’s figures, AP Pension made a 24.5% return on private equity in 2022 as a whole, while PFA Pension reported a return of just 1.0%.

However, all private equity rates of return he gathered from Danish pension funds far exceeded the Xtrackers and iShares private equity indices returns, which both showed the asset class had made a loss of around 30% last year.

IPE asked the Danish FSA (Finanstilsynet), which has done much work on the topic of pension funds’ alternatives valuations over the last few years, whether it agreed with suggestions the firms were taking different approaches to valuing their unlisted assets.

Per Plougmand Bærtelsen, assistant director general of the authority, said: “The regulation requires that the pension companies must make ongoing valuations that are fair.

“It is important for the individual pension saver that the companies continuously value fairly, as this is a prerequisite for good risk management, proper ongoing reporting of returns and to ensure against redistribution between customers,” he said.

Value adjustments on the listed and unlisted markets did not necessarily have to be one-to-one, Plougmand Bærtelsen said.

“However, the Danish FSA finds it remarkable when significant differences are observed between the value adjustments on the pension companies’ alternative investments and the observed value fluctuations on the listed markets,” he said.

Holdt Mikkelsen said to IPE: “The valuation of the pension companies’ illiquid assets is obviously different from corresponding assets on the stock market, where the pricing takes place between independent parties.

”It seems slightly strange that the stock market traded private equity companies down by almost 25% last year, while the Danish pension sector’s private equity investments ended the year in positive territory,” he said.

But Ploughmand Bærtelsen said change was happening at pension funds.

“We have worked through supervision on the ongoing valuation of alternative investments for several years, and we can ascertain that there is a movement underway where companies are developing their valuation processes and valuation methods,” the top official said.

“However, we still believe that there is room for improvement in the industry in general, so this is also an area we will have a special focus on in our inspections in the future,” said Plougmand Bærtelsen.

“We still believe that there is room for improvement in the industry in general, so this is also an area we will have a special focus on in our inspections in the future”

Per Plougmand Bærtelsen, assistant director general at Finanstilsynet

Asked to comment on the issue, Rune Gade Holm, head of private markets at PensionDanmark, said: “We can only speak to our own method, however it is our clear impression that a vast majority of the sector has a similar and prudent approach to valuation.”

Returns across funds differed due to the fact that the underlying investments could be very different from fund to fund, he said.

“As an example, PensionDanmark has a significant exposure to renewables which in 2022 has been positively impacted by increasing power prices leading to significant positive returns in our infrastructure portfolio,” he said.

For private equity, returns could differ substantially depending whether a pension provider’s exposure was towards venture, small cap or large cap, and to what extent they hedged the currency exposure, said Gade Holm.

”Finally, idiosyncratic events in a few funds can impact returns,” he said.

PFA’s group chief investment officer Kasper Ahrndt Lorenzen recently described why Denmark’s largest commercial pension provider had revalued two broad portfolios of unlisted assets in 2022, reducing them in total by around DKK8bn. 

IPE asked AP Pension to comment on the topic, but a spokesman said it was unable to do so by deadline.

In September 2022, the Danish central bank, Danmarks Nationalbank, reported that the pension fund sector’s average return on unlisted shares had been 1% in the second quarter, while having lost 10% on listed shares in the same period.

Unlisted shares made up half of the sector’s total equity investments, it said.

The bank said at the time that it was important the value of unlisted shares was assessed fairly, “for example when customers withdraw their pension investments to change pension fund or risk profile.”

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