Danish pensions funds are overburdened with regulations, and could perform better if they had more freedom to make their own investment decisions, says Peter Dencik, managing director of Singer & Friedlander International Asset Management.

Dencik, who used to be deputy executive director of the pension fund administration company PKA in Denmark, says the Danish authorities have denied pension funds the right to increase their equities exposure by sticking to current laws, and making what Dencik calls a rather curious interpretation of the third EU life insurance directive, which governs the Danish pension funds.

As stock valuations increased sharply, public debate was sparked at the end of last year on the need for an increase in the 40% limit on equities weightings. This limit includes property holdings.

But calls from pension fund managers, and some politicians, for new legislation to raise the limit to 50% went unheeded. They were met with a statement by Minister of Economic Affairs Marianne Jelved that she would not put forward a proposal to change the law. Jelved argued that heavier investment in equities would be too risky for pension funds.

I would argue that not investing in equities is too high risk,” says Dencik, partly because the level of returns gained from stocks is necessary, and partly because of the diversification which equity holdings provide.

That was illustrated very clearly when the bond market collapsed in 1994, he says. Although 1997 is not likely to be a bad year for bonds, changes in the interest rate cycle will inevitably put bond investors at risk from time to time.

The Danish law on equities exposure was last reviewed two to three years ago, when the third life directive was implemented in Danish law.

Dencik cites a June 1996 report from the European Federation of Retirement Provision, which backs investment freedom for pension funds. “This made it clear that pension funds having no restriction tended to have better performance than those operating in an environment where there are restrictions,” he says.

“Some pension funds have obviously already reached the limit.” Younger funds are more likely to have hit the 40% ceiling on stock weightings, Dencik says. Equities weightings have been slowly increasing simply through the relatively high returns gained on this type of investment.

“In this context it is a pity that the Danish government denies its pension funds the opportunity to optimise investment. Eventually the members will have to pay by receiving a lower pension.”

A second issue for Danish pension fund managers is international diversification. Pension schemes are not allowed to leave more than 20% of liabilities unmatched with assets in the same currency, which Dencik says is basically a restriction on international diversification. If the investment is Ecu-denominated, there is only a 50% matching requirement, although Ecu investments are few and far between, he says.

“For a pension fund, I do understand the argument that there ought to be some kind of matching, but my point is that should be an investment decision and not a regulation,” he says. “The exposure to international equities is also a question of risk diversification and the size of your home market.” The choice of foreign investment level should therefore be related to the specific profile of each fund, he adds.

“If and when the Euro is introduced, the matching definition will change. This will increase the foreign investment possibilities.”

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