Rachel Fixsen reviews ATP's international expansion plans, which have caused controversy in Denmark
No one could accuse Denmark's ATP of narrow-mindedness about investment. Still courting controversy in its home country over plans to do business in the commercial banking sector, the operator of a huge slice of mandatory retirement provision has now set up shop in the UK.
ATP acknowledges it has been pushing the boundaries of how a state-linked pensions institution might be expected to invest.
By way of explanation, Morten Nilsson, head of international operations at ATP, says that because contribution levels to the ATP pension have been low in Denmark, it has been imperative that the organisation look at particular types of business model in order to make the most of the funds available.
"Due to the low contribution levels, we have been forced to innovate to keep costs down and secure high performance to ensure there's enough pension and value for money coming out of those pensions. That's a heritage thing, but it has forced us to go a new way," he says.
Back in February 2011, it became apparent that ATP was looking at establishing itself in the UK market. The product was to be a simple and cost-efficient pension platform that would challenge industry practice.
ATP's interest in the UK market had become clear from the bidding process for personal accounts - the early name for NEST - in which it participated. ATP pulled out of the bid process in October 2009, citing as reasons the risk/return balance of the likely new business as well as uncertainty over the number of potential participants. Bidding concluded last March with the appointment of Tata Consultancy Services.
In June - after it withdrew from its personal accounts bid - ATP set up an office in London. The base would, it said, play a vital role in its strategy to exploit its expertise and business model on the international scene.
Nilsson says: "When we look at the UK, we can see there's a clear win-win situation for pension scheme members in Denmark as well as those in the UK."
In Denmark, ATP operates and develops the ATP Lifelong Pension and the Supplementary Pension (SUPP). It managed DKK476bn (€56.4bn) of assets, by year-end 2010, ranking it as Denmark's largest pension fund, and the fifth largest in Europe, with more than 4.6m members.
Its core product, the ATP Lifelong Pension, operates as a hybrid system - a minimal lifelong pension with conditional indexation.
Although an independent entity, ATP manages a supplement to the state pension schemes, and has done so for more than 45 years. Fundamentally, ATP functions as a mutual society, in that the profits go to the members of the pension schemes.
But even though ATP is not technically state-owned, the fund has ruffled feathers in the commercial banking sector with its bid to compete with them in on their own turf.
In September last year, ATP joined up with PFA Pension and Swedish pension insurance provider Folksam to buy the stricken FIH Erhvervsbank. ATP's chief investment officer, Bjarne Graven Larsen, left in December to take over as co-chief executive of FIH. In the meantime, draft legislation to change the regulations surrounding ATP - allowing it to take a controlling interest in banking and credit businesses - has been hotly debated in the public sphere.
The Danish Bankers' Association recently called the proposed legislation "highly unsatisfactory", saying it opened the way for permanently state-owned enterprises to put pressure on the market in an anti-competitive way.
ATP may not be state-owned, but Jørgen Horwitz, the association's director, argued that because ATP received mandatory state funds, an ATP-owned bank would be in a better competitive position than other Danish banks.
"The state guarantee will give subsidiary banks conditions on the international credit markets that other banks cannot obtain," he said.
All this, even though the latest version of the proposed law has been watered down to the extent that it now includes certain limits, including a stipulation that ATP units may not have more than a 5% share of the loans market.
In the face of the furore, ATP has vigorously defended its right to compete on equal terms with other pensions players in the banking sector.
The pension fund's chief lawyer said in an official response to the restrictions contained in the draft law that ATP saw no reason why its investment regulations should not be fully harmonised with the regulations governing insurance firms and pension funds.
Despite worries in the Danish banking industry about ATP's expanding role, Jan Eggertsen, director of business development for Northern Europe at T Rowe Price, says he does not believe ATP has any intention of becoming a bank: "The reason why they want to have the possibility of a higher percentage interest in FIH is because they put a lot of money into that, and now they are part-owner, they want to be able to protect their investment."
Looking back at the changes in the pension fund's business dynamic, he points to Lars Rohde, ATP's CEO, as the driving force.
"They became ambitious ever since he entered the door," Eggertsen comments.
Not only has ATP been successful, he says, but as a first pillar pension institution it has taken its responsibility seriously, looking to create an all-weather portfolio with attractive risk/return characteristics. "The way they have done it is to use a sophisticated risk model, moving away from relative returns and towards an absolute return model," he says.
He believes the international expansion plans make sense: "They've been delivering high returns with almost no risk on the downside, and at very low cost. If you do that - and efficiently - then why not leverage it?"
But what is it about the UK market that appeals to ATP more than other foreign pensions markets? Nilsson says that it is the pensions reform taking place in the UK that makes the market so attractive.
"We learned about the UK from our participation in the personal accounts tender. There is a recognition that there need to be a lot of changes to the pension system here and that makes it interesting. People are not saving enough," he says.
The low-cost pension platform that ATP has in the pipeline could be ready to be launched by the end of this year, Nilsson says. "Right now we are refining our business plan and getting operations into place, so we can make sure we have the right market proposition and the correct business model for ATP."
Although ATP now has premises in London, the new UK operation will not require a lot of local staff, he notes. "It will be a model where we will be outsourcing big parts of the business. We are seeing different ways to gain advantages from day one, and to bring down costs."
"We are not quite ready to reveal the costs, but we are seeing that it is possible to offer very cost-effective pensions here, even in a complex market."
Nilsson does not say whether the UK pension product will be based on passive investment.
"We're still looking into the features of our investment product, but we feel very pleased with the Danish portfolio and how our ATP portfolio has been performing. We like the idea of a diversified portfolio that can do well in all environments.
"The balance is to get the cost right, so keeping it in the low-cost area is something we want. Our main thinking is in the diversified portfolio area."
NEST will now be a potential competitor to the ATP platform, but there is plenty of room in this space for more providers, he says.
"We've been following the auto-enrolment proposals from the coalition government closely. It's quite obvious no one from the establishment has been willing to get all to take social responsibility and get employers on board, so there will be a need for a NEST as a pension fund with the social obligation to offer pensions to all employers and employees."
ATP is already very clear about the segment of the pensions market it is targeting, and sees an urgent need for the kind of pension it plans to offer. "Ten million people in the UK are not saving at all, and there are a lot of people not saving enough," Nilsson says. "We need to keep things very simple, but also try to take some responsibility away from our members.
"We don't believe in financial education, and forcing people to take financial decisions based on not very much information. We believe in taking the responsibility on behalf of our members."
He says ATP in the UK has already received letters from members of the public who say they would like to move their pension money over to ATP, because they are tired of having to make so many choices concerning their pension and paying high charges.
Public perception can perhaps be summed up by likening how much a pension scheme member can expect to receive in retirement to that of a lottery, he says.
"The notion is that you are saving for forty years, and you might hit the jackpot or have a very lousy pension," Nilsson explains. "This is because people don't have much faith in the pensions industry."