Danish pension fund P+ has been handed several official orders by the country’s Financial Supervisory Authority (Finanstilsynet, FSA) to correct procedures around its investment in private equity, with the watchdog warning that some of the failings could lead to the wrong degree of risk being taken.
In a report on an inspection the FSA carried out in June into the pension fund’s private equity investments, the authority levelled the criticism that P+ failed to sufficiently document that the data source behind its risk model to estimate the risk premium for private equity relative to listed shares was relevant, representative and reliable.
“This poses a risk that decisions are made involving an inappropriate composition of the investment portfolio – as the risk model is the starting point for the pension fund’s asset allocation strategy,” the FSA said in the report published on Wednesday.
Regarding risk measurement, the FSA said P+’s principles for calculating the risk allowance for the risk model were “not sufficiently anchored in the board of directors”, and that it had issued an order to correct that.
“In addition, the Danish FSA found that the pension fund’s business procedures do not provide sufficient guidance for assessing risk premiums to the risk model,” it said, handing out an order to remedy this problem too.
Among other orders issued, the FSA gave instructions to P+, which describes itself as the pension fund for academics, to make sure its regular management reporting provided an overview of, and insight into, the private equity portfolio and the developments in it, to ensure executive and non-executive directors had an adequate starting point for their work and decisions.
Responding to the FSA’s report, P+ said in a statement on its website: “We take note of the Danish Financial Supervisory Authority’s orders and are in the process of implementing them.”
P+ has increased its allocation to private equity in recent years, and is now approaching the industry average, according to the FSA.
P+’s private equity investments – all made through an external private equity fund manager – amounted to around DKK9.5bn (€1.27bn) as of the second quarter of this year, or some 5.8% of its DKK165bn of total assets, the authority said.
Within private equity, it said the pension fund focused mainly on buyout funds with specialised strategies for medium-sized companies and associated co-investments, supplemented by co-investment funds targeting larger and smaller companies.
Pension and insurance firms’ alternative, unlisted, investments have long been an area of focus for the Danish FSA, which this month issued updated guidance on how they should be managing investment risks for those assets, including private equity.
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