The major Danish scheme talks to Fennell Betson

The Danes are fond of pointing out that theirs is a small country. But outsiders should be wary of downsizing all facets of Danish life. This is certainly the case in the pensions area, where a number of the industry-wide labour market schemes are on track to rank eventually among Europe's biggest pension funds.

The Copenhagen-based PKA will be among these, with funds of Dkr48bn ($7.4bn) and an inflow of new contributions amounting to Dkr3bn each year on behalf of its 120,000 members. As there are only 10,000 pensioners at this stage, the funds are growing rapidly.

With typical Nordic no-nonsense, PKA stands for what it does - Pension Funds Administration. Formed some 40 years ago by a number of pension schemes , it now handles all aspects of the administration, from contribution collection and investment to pensions payment for eight schemes.

The PKA schemes range across mainly public employees, including nurses, midwives, occupational therapists and physiotherapists, hospital catering staff, social workers and vary in size from Dkr22bn to Dkr600m. Not surprisingly, women make up over 90% of members.

Amassing their funds centrally clearly provides opportunities for economies of scale on the investment side for the schemes, but each scheme will have its own investment profile, explains PKA's head of equities Nina Movin. Generally, the aim is to keep the asset allocation in line as far as possible, so that the returns do not vary too much from each other.

But the assets for each specific fund can differ" she says. "So one fund could have 'x%' in equities, which could be a bigger or smaller proportion than other funds. But their portfolio of shares will reflect what the other portfolios have."

One reason for varying the amount of equities is to try to match each fund's risk profile, she adds. "You have to be a pretty rich pension fund to invest in property, unless you are certain you will get a regular income from it."

Each pension fund has a board comprising both employee and employer representatives who set the investment objectives for their funds. "They will give us definite guidelines, while allowing variations to a specified extent." Obviously, the investment team at PKA will have an input into the guidelines and will make suggestions, for example, as to the extent that the particular fund should invest outside Denmark. PKA's overall objective is to obtain the highest return for the different funds' members and benchmark returns are drawn up for each fund. A set of strategic longer term goals that PKA is expected to adhere to are set down, but the investment team has the necessary latitude to act as they feel is best for the fund. "Our appoach is that we have the necessary freedom to do what we want, but we must keep the fund informed about what we are doing" says Movin.

For property investment, they have to obtain specific permission, while for investment in an un-quoted company, each fund is informed beforehand, and it is up to them to come back with any objections. "This has only happened once or twice in the time I have been here," she says.

Some general restrictions are in force such as not investing in armaments-producing companies and previously not investing in South Africa during apartheid. Some funds have wanted to pursue environmental policies and PKA responded by creating an environmental company, Invest-Environment . "But we point out that such activities have to be lucrative" says Movin.

Bonds, including index-linked issues, account for around 60% of PKA's total portfolio. With the returns that have been available domestically, only a very small proportion is in overseas bonds, Movin points out. The portfolio has around 35% in equities and is thus approaching the 40% limits on equity exposure allowed under Danish law. As only 10% is in foreign equities, the legal requirement that 80% of assets be in Danish currency is in no danger of being breached. The balance is in real estate and cash.

Movin acknowledges that the equity proportion is high for Denmark. The domestic portfolios are managed inhouse. "Our equity approach is essentially active. However, while we do not have a passive element as we have had in the past, we definitely look toward the index. So as far as the bigger Danish companies are concerned we will not be that far from the market. In that way we ensure we are getting a core market performance." PKA looks to the smaller caps stocks and the unquoted sector to provide the extra edge to the returns. "We have a big unquoted portfolio of just under Dkr1bn. These are in all stages of development, and only a small amount is in venture capital situations. What we would love to have is more companies heading for the market in a couple of years' time." Adding with a sigh - "That's where the real money is and it happens all too rarely".

These private equity holdings demand a lot of work, she adds. PKA does not sit on boards generally, but will have people on them. "Normally, we ask the companies what skills do they think they need on the board. If they point to specific capabilities, then we try to supply these." The overseas equity portfolio is all externally managed, with a range of managers looking after the portfolio that is around DKr2.6bn, about Dkr1bn of this is in the US large cap mandate. "We have just appointed a new manager to run our mid-cap US investments." There are separate managers looking after portfolios for European equities (ex-Nordic region and ex-UK), UK equities and Japan.

"At the moment, we do not have a manager for the emerging market area, but this is something we are looking at," says Movin. PKA used to be invested in the Far East, outside Japan, but withdrew its money sometime ago. Another recent move has been an appointment to run a South African portfolio.

Real estate has been a traditional area of investment for PKA, along with its measure of disappointing results. "Property has been the worst performing asset class for a decade. And we have learned a lot in this area. Currently what is being invested is income producing property." In fact , PKA controls 85% of Dan-Estate, a property management company quoted on the stock exchange, which provides services for the properties the fund owns. "We also have a small exposure to the UK market - just to learn - in fact it has done well!"

The fund takes its foreign currency exposure on the chin. Movin says: "We have done a lot of studies into currency, looking at the costs and the extent to which you can reduce your risk. So far we do not see big advantages." But the area is kept constantly under review, especially as the overseas commitment grows.

PKA is very unlikely to use pooled funds in portfolios. The main reason is the prohibition on in-vesting in armaments' producing companies, she says. "And we have not found enough friends among their pensions funds with the same restriction to set something up ourselves. Also our advisers say that mutual funds are more costly to run than segregated accounts. What we have is less expensive!"

Movin believes that that there are advantages for external managers, though they might not accept this, coming from the fact that PKA does so much of its own management internally. "We may not be a better customer, but we could be an easier one - as we are more aware of what we really want. If you are not involved in the management of the investments, you can have unrealistic expectations."

But on the corporate governance sidePKA does not want to see matters go as far as they have in Sweden, where separate meetings between companies and their investors are no longer permitted, under insider trading rules. "We want to have the freedom to be able to judge companies for ourselves and to have them explain what their policies are face to face."

Should the Danish limitations be liberalised sometime in the future, she sees an increasing overseas and equity exposure but only in line with PKA's funds' liabilities and risk profile - so it is not a foregone conclusion. "But if you look ten years on, I think that the asset distribution of pension funds in Europe will look a lot more alike.""

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