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Special Report

ESG: The metrics jigsaw


Keeping it simple, but also flexible

Founded by the parties negotiating the collective labour agreement for Denmark’s industrial sector, notably the Confederation of Danish Indsutry (Dansk Industri) and trades union cartel, Centralorganisationen af Industriansatte (CO), the Copenhagen-based Industriens Pension is a joint stock life insurance company, with all profits going back into the company as members’ benefits. This structure allows Industriens specific tax breaks, since it does not pay corporation tax, only pensions profits tax.
In recent years, the fund has developed a greater range of savings and insurance products which will be used to encourage members to contribute more to supplementary and unit-linked schemes in addition to their mandatory contributions.
Industriens’s main objective is to provide simple, understandable and customised pensions and insurance arrangements under one contract. It believes each pension should be flexible and tailored to individual members’ needs and wishes.
To achieve its objective, the fund needs to optimise profits and guarantee a certain level of security by maintaining at least the face value of investments. Thus its business strategy is divided into five segments: products; service; profits; cost awareness; communication.
Certain areas of Industriens’ activities are still outsourced, but the fund says this is basically dependent on costs and, with the rapid rise of the scheme recently, more and more areas are being brought under internal management.
This also applies to consultants. Industriens says it does not use external advisers since it wants to develop the relevant pensions knowledge and expertise internally as part of the fund’s future development and growth.
Insurance administration and some asset management, particularly overseas equities administration, do, however, continue to be outsourced. The rest of the fund’s insurance activities are taken care of internally and Indistriens says the main reason some asset management is still placed externally is because it can make full use of different manager styles as a means of spreading risk. Altogether, the internal portfolio management team consists of seven members.
Membership to the Industriens Pension scheme is mandatory and the fund covers some 8,500 businesses. Its membership, just over three quarters of which are men, is relatively young with an average age of 40, the average annual contribution rate in 2002 totalling Dkr18,636. However, the savings rate is increasing as the fund matures so by the end of last year the average savings per premium member stood at Dkr55,788.
Contributions are split between the employer and employee, with the employer accounting for two thirds. Contributions are made monthly and are not part of taxable income. The original contribution rate was set at just 0.9% but this has risen steadily ever since to its current level of 9%. The rate of contribution forms part of the collective bargaining agreement and is looked at every two years, though levels may remain in force for up to four.
The fund offers a wide range of insurance and pensions benefits covering retirement, invalidity, death and critical illness with practically half all its liabilities offering a liability guarantee of 2.5%. However, this may be revised if Industriens feels insurance risk or the interest level is becoming negative for the fund as a whole. The current guarantee has stood since 1999 and was determined by a drop in interest levels.

Asset liability modelling
Asset liability modelling is an essential part of Industriens investment activity and it undertakes this itself using self-developed tools. The fund says it uses both active and passive simulations to determine interest sensitivity for both elements. The absolute sensitivity of the two elements is then compared to create a benchmark. Industriens says that not surprisingly, passive interest sensitivity is far greater than active interest as a result of the low average age of its members. A strategy has been formulated to determine what proportion of the difference in the sensitivity levels should be covered. There are no tactical factors involved.

Investment strategy
Industriens primarily functions around an investment philosophy which it says determines the framework for an investment strategy that is designed to maximise profits whilst simultaneously reducing risk. The fund’s strategy calls for a diversified investment portfolio comprising different asset classes and tactical weightings.
The investment policy is designed to react and evolve in different market conditions.

Risk management
Part and parcel of Industriens overall investment strategy includes maintaining its position in the top tier of its market whilst keeping risk down. The fund tries to identify risk which will allow optimal returns. Moreover, it says it avoids, or at least limits, any risk which doesn’t have a positive impact on the relationship between expected profits and anticipated risk. This is because Industriens believes this is an area where risks are incurred but not accounted for in profits.
The fund generally uses value-at-risk as its basic risk measurement tool. Tracking errors amongst others factors are used when evaluating the composition of its investment portfolios, whilst the fund sets maximum boundaries for the risk inherent in interest, foreign exchange and counterpart risk.

Highlights and achievements
Industriens is proud of the growth it has achieved since being created in 1993 with an extremely limited capital base and product range. It feels its adhesion to its investment philosophy, which was originally limited in its scope, has seen it develop investment strategies that have taken it to the top of its market. This, coupled with the solid reserves, ensures the fund will maintain its high profitability and standing and its investment policy is now more liberal.
Industriens has been able to keep abreast of changes in market conditions by gradually and continuously expanding its services and product range and has thus remained competitive and at the forefront of Denmark’s pension fund industry. Further non-investment enhancements to its administration, such as its extensive website and communications policy, will also ensure future success.

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