A European Pensions Giant Is Freed to Sell Bonds, Add Risk

ATP, a state-backed pension fund in Denmark with about $150 billion under management, is set to shift a larger chunk of its portfolio into risky assets after the government said it wants the investor to chase higher returns.

In legislation published late on Friday, the Danish Labor Ministry said it intends to “give ATP better scope to generate the best possible real returns for its members.”

The announcement marks a milestone, and means one of Europe’s biggest pension funds may now start selling bonds as it looks for more lucrative places to invest, against a backdrop of historically low interest rates.

Jesper Rangvid, a professor at the Copenhagen Business School, said the proposal means ATP will no longer be as bound by a model that had forced it to hold long-term government bonds that were “basically not providing any returns.”

ATP has so far dedicated about 80% of its assets to a so-called hedging portfolio filled with fixed-income products, with the rest in a higher-risk investment portfolio. The government’s plan means it will now be free to use up to 25% of the allocation to the hedging portfolio on risky assets.

“The changes will release a significant amount in the billions, which can be invested at a higher risk and therefore a higher expected return,” the ministry said.

A spokesman for ATP declined to comment, but said the fund will provide more details on Monday.

Ultra-Low Rates

ATP has long been exploring such an adjustment to its portfolio as it faces an historically long phase of ultra-low rates. In Denmark, central bank rates have been below zero for over eight years, which is longer than anywhere else in the world.

The fund has yet to report its full-year results. For the first nine months, it generated a 3.6% return on its investment portfolio, before tax.

“The problem of course is that the only way to get a positive expected return these days is to take on more risk,” Rangvid said. “That’s the dilemma, of course, of all pension funds with a lot of guarantees, including ATP, that if you want an expected positive return, you have to take on risk.”

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