Success comes to the nimble-footed

Industriens Pension is the largest of a number of
pension schemes based on collective bargaining
agreements that were established in Denmark in
the early 1990s to provide supplementary pensions
for the country’s workers.
The scheme covers the entire industrial sector and
has around 320,000 members in 8,200 companies.
The industrial workers’ scheme has a number of
advantages that ensure that, unlike many European
pension funds, its assets will progressively outpace
its liabilities.
One advantage is its fiscal status. Industriens Pension
is a not-for-profit life insurance company
owned jointly by the Confederation of Danish
Industries, which has 35% of the
share capital, and six labour unions
within the Central Organisation
of Industrial Employees in
Denmark, which own the
remaining 65%.
As a non-profit, labour
market-related insurance
company, the
pension scheme is
subject only to a 15%
pensions tax on its
assets, and not the
significantly higher
corporate taxes
imposed on commercial
life insurance companies.
Industriens Pension
also has the advantage of
being a compulsory contributory
scheme, to
which both employer
and employees contribute.
Since it was launched
at the beginning of 1993, successive
collective agreements
have increased contribution
levels. Contributions, as a percentage
of workers’ salaries,
have risen tenfold from an
initial 0.9% in 1993 to 9%
in 2003. The current
rate is
Next year, this will rise further to 10.8%.
This is still well short of the average contribution
of 15% in most Danish pension funds. However,
these increases have resulted in a steadily growing
asset base. Currently Industriens Pension assets are
around DKK 33bn (€5.5bn) and this figure is
expected to double in the next five to six years
At the same time, Industriens Pension has a shrinking
base of commitments, in terms of the guarantee.
Older established pension schemes in Denmark typically
have to meet a 4.5% guaranteed rate. The maximum
rate set by the Danish Financial Supervisory
Authority (DFSA). However, Industriens Pension
was established when the maximum
guaranteed rate had been lowered
to 2.5%, and it has since
been reduced to 1.5%.
Jan Østergaard, the
head of investments
at Industriens Pension,
says this will
reduce the liabilities
of the pension
scheme in the long
run. “We have less
than 40% of our
membership at a
2.5% level. The
rest are at a 1.5%
level, and that is
a conditional
1.5%, since it
would be possible
for Industriens
Pension to recalculate
those guarantees
if either the interest rate
level becomes very low,
lower than the guarantee
rate measured by the
maximum rates
announced by the DFSA,
or if people live longer
than calculated.
“So we have guarantees of 2.5% on 40% of our liabilities,
and that is a diminishing figure because
most of the growth will come from the 1.5% and the
1.5% is not unconditionally guaranteed.
“Therefore, it is for a smaller and smaller part of the
liabilities. Industriens Pension needs to earn a
return after tax and costs of only 2.5% plus a little bit
more.” The scheme has done considerably better
than that in the past few years, returning 12% in
2003, 10.2% in 2004 and 9% in the first half of 2005.
“We are very happy with these results, after having
had two years very close to zero during the equity
crisis,” says Østergaard.
The transition from zero to double-digit returns
was achieved initially by switching from equities to
higher risk credits, notably emerging market and
high yield debt. Following the equity market collapse
in 2000, the scheme reduced its exposure to
listed equities from 37% to between 17% and 18%
and increased exposure to credits from zero to
between 10% and 12%.
“In effect we moved the risk from equities to credit
bonds market debt and high yield,” says Østergaard.
“After the crisis we were able to increase the
equity exposure again up to where we are today,
which is about 33%.”
The success of Industriens Pension’s nimblefooted
investment strategy has been noted. The
Kirstein Finansrådgivning Life and Pensions 2004
survey rated Industriens Pension top performer in
the Danish pension sector, a remarkable achievement
for a relatively young fund.
In its current investment strategy, Industriens
Pension has split the management of its assets into
two parts, says Østergaard. The first, and smaller
part is dedicated to hedging the interest rate guarantees.
“The average duration of our liabilities is very
high, more than 25 years and of course that means a
lot of interest rate sensitivity. So we have focused on
what you could call the free reserves risk – the risk of
being insolvent. Even though we have a lot of
reserves and we don’t have high guarantees, we
think you should care about that risk.”
The move to fair value accounting in Denmark in
2003, well ahead of the requirements of international
accounting standards, encouraged this kind
of focus on liabilities. “We made a number of simulations
to try to learn the behaviour of our liabilities.
Now we have a very precise picture of how liabilities
will behave if interest rates change and,
most important, if rates continue to
“We considered how safe we
wanted to be, and we decided that
we should at least be able to survive
a fall in interest rates to 1% and
a 30% fall in the value of equities.”
“Therefore we have increased
interest rate sensitivity a little but
not much, since we have substantial
free reserves. The problem, of
course, with increasing the interest
rate sensitivity is that you will
lose a lot on the assets when
interest rates rise again.”
Industriens Pension is using a variety of derivatives,
including strips and receiver swap, to achieve this, he
says. “Altogether it’s not very much, but it’s enough
to ensure that Industriens Pension would not
become insolvent in even the most unlikely scenario.”
The main part of the strategy is active management,
however. “We believe very strongly in active management,
both at a portfolio level – by which we mean
hiring active managers – and also at a tactical level,”
says Østergaard.
In the first five years of operation, Industriens Pension
outsourced its entire portfolio to external
managers. Most of this was managed in a single
balanced mandate. However in 1998 Jan Østergaard
was hired as head of investments and given the task of
building an internal investment department from
It was decided to take some of the management of
the portfolio in-house, in particular domestic equities
and fixed income. “The first thing we in-sourced were
the bond holdings. Currently about half of total assets
are managed internally as a portfolio of non-credit
bonds, gilts, governments and mortgages.”
The scheme also diversified its exposure to asset
classes, and became the first Danish pension fund to
venture into emerging market equities and debt. “We
have followed the principle of diversifying as much as
possible. The limiting factor in the early years was the
very small amount of money and the cost of having a
lot of asset classes. But when it became possible we
added more and more asset classes, like emerging
market and high yield debt.
“It has been good for us to be invested early in these
asset classes and they have given us a tremendous
In June this year, Industriens Pension’s portfolio
was invested 27.5% in Danish nominal bonds, 14.3%
in foreign nominal bonds, 5.8% in emerging market
bonds, 9.6% in Danish index bonds, and 6% in foreign
high yield corporate bonds.
The lower-yielding corporate bonds are less attractive,
says Østergaard. “We haven’t invested in any
investment grade corporates because we haven’t really
found a reason to do so, neither with regard to enhancing
expected return nor reducing risk. If spreads
should widen, however, that could be a different situation
and we would consider investing in them.”
Industriens Pension also decided in 1998 to take
some of the management of Danish equities inhouse.
Currently it shares the management of the
domestic equities portfolio with Copenhagen-based
Yet in spite of its growing financial muscle, Industriens
Pension has decided to leave the management
of foreign equities to external managers, The strategic
asset allocation to foreign equities is 20%, double
the allocation for Danish equities, and the decision to
out-source is a reflection of their importance within
the portfolio, says Østergaard: “Since foreign equities
is strategically one fifth of our total assets, it’s very
important how we do things there.
“We might be able to run foreign equities portfolios
in-house cheaper than using external mandates. But
we find that what we get from external managers in
terms of different styles and processes, thereby
improving a lot of the risk return characteristics of the
portfolios, is a very good argument for continuing
using external mandates.
“What we should be good at is hiring and monitoring
external managers and building up an internal
expertise in that. That’s what we should use our
resources for.”
Growing asset strength has enabled Industriens
Pension to implement what it considers the ideal
structure for managing foreign equities, says Østergaard.
This is a structure of purely regional mandates.
It has divided the world into five regions – North
America, Europe, Japan, Global Emerging Market,
and Developed Asia; that is, Hong Kong, Singapore,
Australia and New Zealand.
“We don’t use global mandates any longer. In our
experience, the problem with global mandates was
that the different regions are so different in nature and
the possibilities of adding value are so different from
region to region that it seemed very difficult to find
the right philosophy and process for the whole world.
“So now we try to find for each region the right type
of mandate. The right philosophy, the right process,
the right type of risk, the right amount of tracking
error. In that way we can use our risk budget more
A major problem of running global mandates is
squeezing any added value out of large-cap US equities,
which represent some 50% of the market. Industriens
Pension does not attempt to create a lot of
added value from this market, and instead has two
enhanced index mandates for US large caps, run by
Invesco and Quantitative Management, both based
in US.
“They’re very cheap to run compared with high
alpha mandates,” says Østergaard. “They don’t add
a lot of alpha but they have a very good information
ratio. We think that’s the best you can do about that
market. So far we haven’t seen any convincing arguments
that high alpha mandates consistently add
alpha for US large caps.”
Industriens Pension takes a diametrically opposed
approach to US small and mid caps, however. It
uses Axa Rosenberg to actively manage a US
small-cap mandate with a high tracking error. “This
gives them lots of possibilities for adding alpha, and
we’ve had a lot of alpha from that market.”
The juxtaposition of active and semi-passive mandates
enables Østergaard and his team to take tactical
bets, weighting US large caps versus small/mid
caps. They can do something similar in the European
equities market where they have two large-cap
mandates, run by UBS and JP Morgan in London,
and one European small-cap mandate, run by State
Street Global Advisors in Paris.
The regional structure also allows them to make tactical
regional bets, says Østergaard. “We use the
MSCI World, in which, for example, you don’t have
any emerging markets, so any exposure to emerging
market equities is going overweight for us.
“This is an area where we think we have performed
extremely well in our active management strategy and
where we have recently we have increased our overweight.
Some 20% of our current portfolio of foreign
equities is in emerging market equities.
Østergaard sees Developed Asia, which accounts
for only 3% of MSCI World, as a gap in the structure,
and is currently looking for a manager for this region.
“This has been a market where it has been possible to
add a lot of alpha and we are going for a mandate with
a quite high tracking error.”
Industriens Pension is also looking for a second
global emerging market manager in addition to the
current manager, Pictet Asset Management. “We are
very happy with Pictet, who have performed well
since 1999. The reason for hiring another merging
markets manager is that it has turned into a big asset
class for us and we feel we should have at least two
managers to diversify risk.”
Industriens Pension has also taken an unusual
approach to unlisted equity investment. “In the
beginning we invested through a small number of
global funds of funds just to start with the necessary
risk diversification. They have fulfilled expectations
so far and we have a satisfactory return from them.
“But the extra level of administration is expensive.
So we decided at a quite early stage that in our private
equity investment process we should build up internal
expertise in private equity.”
Investment is spread between Europe, US, Denmark
and the rest of the world across a variety of private
equity vehicles, principally buy-out, venture,
mezzanine, fund of funds and secondary funds.
“Currently we have made about 20 commitments
since 2000, the main part since 2003. To reach our
target of 2.5% of total assets - and a long-term goal of
5% - we have to commit at least DKK 1bn every year.
This means at least five funds but probably closer to
eight funds a year.”
Industriens Pension still uses fund of funds in areas
of private equity where admission is difficult and local
knowledge is essential, notably the US venture market.
“It’s a market where the difference between the
top performers and all the others is very big. If you
can’t reach the top performers then you shouldn’t be
there,” says Østergaard.
Another example is the European mid market buyout,
which requires strong local expertise. Expertise
is the key, as Østergaard acknowledges. “In private
equity, we have built up a network of contacts rather
than waited for the phone to ring or the e-mail to
This sums up Industriens Pension’s approach to
asset management generally, he says. Developing
investment know-how means more than building
appropriate investment skills in-house. It means
knowing whether to hire, when to hire and who to
hire. This approach is clearly paying off.

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