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Rachel Fixsen investigates the pressures that Danish pension funds are facing to align their investments in support of the domestic economy

In times such as these, when economic growth hovers tantalisingly on the horizon but credit still fails to flow, no one can blame the eyes of government for turning to the trillions of euros held by pension funds.

In Denmark, pension funds hold sway over some DKK2.5trn (€335bn) of assets at a time when government finances are shrinking, and some of the smaller companies that form the backbone of the economy are facing ruin unless they can access finance.

Leading pensions consultant Jesper Kirstein sees the situation clearly. "There's no doubt that there are some very strong demands for pensions money at the moment," he says. "Every time, people look at pension funds and ask: ‘Why aren't they doing something?'"
This summer, Denmark's prime minister proposed setting up a DKK5bn (€670m) venture capital fund in conjunction with pension funds, with the aim of sourcing financing for small and medium-sized businesses.

Economics and business affairs minister Brian Mikkelsen met with representatives from industry body Forsikring og Pension (F&P), the supplementary labour-market pension scheme ATP and the state fund LD. Discussions are on-going.

Other investment schemes are under discussion too, involving public-private partnerships, which would keep money flowing into public-sector enterprises in Denmark, such as investment in hospitals and infrastructure.

Although the negotiating parties are publicly optimistic about the chances this venture capital fund will come to fruition, Kirstein is sceptical. "The big question is why should pension funds invest if the public is not willing?" he asks.

Perhaps it is hard for the public to understand that Denmark's pension funds cannot simply step in and help, particularly when some say they did just that back in the 1980s.

Jannick Nytoft, CEO of the Danish Venture Capital & Private Equity Association, says there was a culture in some places in Denmark in that period that pension funds should be willing to support social goals. "But they lost large amounts of money, and in the 1990s there was a paradigm shift," he says.

The current financial crisis has sent government back to knock on the doors of pension funds, but this time things are very different, he says.

Some of the major pensions players were accused of buying up companies in trouble 30 years ago, says Kirstein. "At the time, the criticism was so hard that they won't do this again," he says, noting that major player ATP in particular is very careful not to invest in projects that will not pay.

Peter Damgaard Jensen, chairman of industry association Forsikring og Pension (F&P) acknowledges that the pension funds do have a certain social duty.

"Pension savings in Denmark are a big part of the total savings, and so we have to play our part," Damgaard Jensen comments. "But definitely not in a way that brings our members into any kind of danger."

But will it be possible, this time around, for pension funds to resolve the potential conflict between the twin responsibilities of supporting the domestic economy and achieving the best returns for scheme members?

"If the different ideas and projects are handled correctly, and we can be sure that the government will take part of the responsibility, then there's not such a conflict; we can make good returns and still do something for the national economy," he says.
Current needs may even throw up opportunities the funds are thirsting for.

"It would be interesting to do infrastructure projects," says Damgaard Jensen. "Many of the Danish pension funds have invested quite a lot of money in infrastructure projects abroad, in the EU, the UK and also in the US. We think it could be interesting because there are some big projects in Denmark.

"These long-term projects are natural for us as long-term investors and actually far more fitting than investment in SMEs," he says.

Potentially, however, a sense of responsibility to the home economy, could lead pension funds in Denmark to skew their geographical allocation to the domestic. ATP CEO Lars Rohde does not see this as a problem for Danish funds.

"Pension fund investment does tend to be globally diversified," he says. "But the irony with globalisation that this went too far. The diversification argument is not as good as it was 10 or 15 years ago, because the markets are moving more in line with each other, so the gains are not as good as before."

Most countries have some kind of home bias, he points out. "If the gains are not as large as they used to be, then there's another factor at play - simply that we have an information advantage in the home market," Rohde notes.

Looking at infrastructure, Damgaard Jensen says that Danish pension funds have very little money invested in infrastructure within Denmark at the moment. "It could easily be raised quite a bit before you could say there was enough domestic investment in this sector," he says.

Similarly, ATP finds itself short of the asset class within national borders. "At ATP we have quite a lot of experience now with infrastructure abroad, but not in Denmark," he says, describing this as something of a paradox.

ATP has made it known in public and to the government that it would like to invest in Danish infrastructure, but so far, Rohde says no opportunity has presented itself.

"The question now, is how to shape a model suitable for investment, and one that is just as attractive as the foreign infrastructure investments. First and foremost, we have to earn a good risk-adjusted returns on our investments; it makes no difference if it's in the Danish market or abroad."

Or almost no difference, he continues. Since all ATP's liabilities are denominated in Danish kroner, having investments in the same currency clearly lowers the foreign exchange risk, he says.

Damgaard Jensen is also managing director of Denmark's PKA - the administration company for eight pension funds mostly within the public social and health sectors. PKA funds have already invested in health centres and social institutions in Denmark, and are also part of a group that invests in schools and other public buildings, he says. They have invested in an infrastructure fund too.

ATP has said it is ready to invest in the Danish healthcare sector, probably in hospital buildings, as long as a new investment model can be found. But it is still early days, Rohde cautions.

"We haven't got a single krone invested yet, so it is still all up for discussion. If there's an attractive model, then we would get involved. This certainly wouldn't mean us running the hospitals, but it could be by part-owning the buildings or support functions," he says.

Denmark is far from alone in looking to its pension funds in the current dismal economic climate. There are plans afoot in several countries for pension funds to play a part in providing much-needed funding for business as well as public sector projects, says Damgaard Jensen.

"We have suggested to the Danish government that it would be a good idea to look at other countries to see what they are doing," he says.

Whatever the history of some pension funds, ATP is certainly not worried about going down the route of the 1980s again, Rohde insists. "There is much more understanding among the political parties that we are simply here to produce a return for our members, and we can't make any cheap presents to the government," he says.

There is no pressure from the government over the issue, he confirms. "But now and again there can be mutual interest," he adds, citing what happened during the currency crisis two years ago as a good example.

The Danish krone was under pressure and because of the interest rate gap between DKK-denominated bonds and their euro counterparts, ATP found it in its own interests to sell German bonds and buy Danish notes - a move that made significant profits for the giant Danish fund.
 

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