A $130 Billion Portfolio Is Under Review at Top Nordic Fund
The biggest pension fund in the Nordic region may rejig its $130 billion portfolio to help it cope with long-term negative interest rates.
ATP, which is based north of Copenhagen, says it’s doing a “comprehensive” review, and there are “big decisions” ahead, Chief Executive Officer Bo Foged said in an interview. Measures may include shifting the basic allocation model at the fund to allow it to offload bonds and add risk.
ATP is trying to run a pension fund in a country that’s had negative rates longer than any other place on Earth. Denmark’s central bank first dipped below zero in 2012. Two years later the European Central Bank followed. The regime is great for borrowers, but punitive for those trying to build enough savings to retire on.
Foged, 48, says negative rates raise the question of whether it “really makes sense to save money in world where you start to lose money.”
ATP, which says it “might end up changing nothing,” is far from alone in figuring out how to adapt to a rate environment that once seemed unthinkable. In Finland, the head of investments at Ilmarinen Mutual Pension Insurance Co. says his industry is “just starting to see what kind of new challenges [negative rates] will cause.”
“If we look ahead, it is a challenge that we’ve gotten a lot of upside on the declining interest yields around the world,” Foged said. “And we are of course asking ourselves if we should continue to buy as many bonds as we have done in the past. That is one of the things we are analyzing at the moment.”
Pension funds have long acknowledged that it’s no longer realistic to chase highly liquid securities. With a large chunk of euro-zone government bonds yielding less than zero, investing in safe assets has become a sure way to lose money these days. Instead, the industry is piling into so-called alternative assets, which can be harder to sell when markets turn. These include private equity, real estate and infrastructure.
Denmark’s pension and insurance industry, including ATP and general insurance companies, had assets of 4.77 trillion kroner ($703 billion) as of September 30, according to new central bank figures. That’s about twice the size of Denmark’s economy.
The companies have roughly 4.1 trillion kroner invested in stocks, equity, bonds and investment funds. The remainder is in unlisted assets, including property, private equity and infrastructure such as wind farms, according to the central bank.
Denmark’s pension and insurance industry posted aggregate returns of 479 billion kroner in the first nine months of the year, according to the central bank.
For ATP, Foged says all models are being considered. That includes a long-held policy of allocating 20% of contributions to riskier assets (ATP’s investment portfolio). The other 80% has traditionally been channeled into bonds and interest rate swaps (a hedging portfolio), to ensure ATP can cover its obligations to pensioners.
It’s not the first time ATP is rethinking its investment structure. Not long after Denmark first resorted to negative rates, a little over seven years ago, ATP adjusted the discount-rate curve it uses to calculate its liabilities. It also started reassessing savers’ returns every 15 years (instead of only once). What’s more, a factor-based investing model was adopted instead of standard diversification. The fund thought it was well equipped to deal with very low interest rates. But no one predicted what was to come.
Fast-forward to 2019, and it’s now becoming the consensus view that negative rates will probably be around for many years to come. Jyske Bank, Denmark’s second-largest listed lender, estimates the country is facing another eight years of life below zero.
ATP has relied on record-breaking results from its investments in stocks and alternative assets to cover roughly seven years of losses in its hedging portfolio. And so far Denmark’s pension industry has delivered bumper results, as all asset classes performed well.
But another worrying trend in the current cycle is the tendency of different asset classes to move in tandem. That has funds like ATP worried about what might happen when markets turn.
“The insurance premium that you’re paying on government bonds at the moment is fairly high,” Foged said. “So the question you have to ask yourself is whether that is an intelligent way to construct a safe product in 2019 and 2020, and so forth.”
The model that ATP settles on could prove instructive. Denmark has one of world’s best-performing pensions systems, and shares the top rank with the Netherlands, according to the Melbourne Mercer Global Pension Index.
ATP will always offer some sort of guaranteed return to pensioners, because of the crucial role the state-backed fund plays in the Danish insurance system.
“It’s very important with the guarantee,” Foged said. “But of course you can always ask yourself how much [of a] guarantee should you give.”
“These are big decisions that we really have to think through and analyze for a period,” he said. “Then we’ll come out with some, hopefully intelligent, answers at some point in time.”
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