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IPE special report May 2018

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Private assets generated one-third of ATP’s 2016 gains

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Denmark’s giant labour market supplementary pension fund ATP posted a 15% return on its investment portfolio in 2016, with almost a third of the return coming from the strong performance of just two of its private equity investments.

However, the fund made an overall loss of DKK649m (€87.2m) in 2016, largely due to hedging losses and the fact it added an extra DKK9.9bn to its coverage of guaranteed pensions to account for longer average lifespans seen in the country’s population.

ATP’s new chief executive Christian Hyldahl said: “2016 was a satisfactory year for ATP – and for our members.”

Even though it had been a turbulent year, he said, ATP had nevertheless managed to produce a good investment return. The 15% gain compared to its 2015 return of 17.2%.

“The results have enabled ATP to further prolong the lifelong pension guarantees, as the life expectancy of the Danish population is increasing more than expected,” Hyldahl said.

Hyldahl started his new job at the helm of ATP at the beginning of January following Carsten Stendevad’s departure.

The pension fund singled out private equity and corporate bonds as having made particularly positive contributions to the investment return, producing profits of DKK6.6bn and DKK3.8bn, respectively, towards the overall DKK15.3bn investment portfolio gain.

During the year, ATP said it made a profit of around DKK5bn on just two private equity investments — DONG Energy and payments firm Nets.

“Real estate, bonds, domestic listed stocks, commodities, and infrastructure also contributed positively to the return,” it said.

However, within the investment portfolio, the statutory pension fund’s long-term hedging strategy against inflation increases had been the largest detractor from returns, suffering a DKK1.2bn loss, it said.

ATP divides its assets — which amounted to DKK759bn at the end of December, up from DKK705bn a year before — into a large hedging portfolio, which backs the pension guarantees it gives, and the smaller DKK100.5bn investment portfolio. 

Returns achieved on ATP’s investment portfolio are not directly comparable with those of most pension funds because of the leveraging effect from the hedging portfolio’s assets.

ATP’s larger-scale hedging activity — its hedging portfolio to back pension guarantees — dealt a DKK4.1bn loss last year, mainly because of the effect of a break in the yield curve the fund uses to discount pension liabilities. 

This break in the curve results from the change ATP made three years ago in the way its guarantees are structured, which was aimed at lessening its sensitivity to prevailing interest rates and boosting its investment flexibility.

ATP fixed the interest rate on the discount curve at 3% after the 40-year mark, using market rates before this point.

Before the yield curve break, the hedging activity loss was only DKK100m for 2016, it said.

Falling interest rates over the course of 2016 inflated the value of ATP’s guaranteed pensions significantly to DKK659bn, with its liabilities increasing correspondingly, the fund said.

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