Danish pension investments in alternative asset classes has passed DKK 500bn and now make up 14 per cent of the sector’s overall assets, according to Danmarks Nationalbank.

Its analysis of the pension industry’s investments in alternatives stated that the increased allocation had provided diversification and stable returns, but also altered companies’ solvency and liquidity.

The report noted that focus on alternative investments was set to continue in the coming years, with pre-commitments to future investments of around DKK 250bn already made, mainly in alternatives.

This partly reflected the sector’s commitment to reaching green investments of DKK 500bn by the end of the decade, according to the report.

Danmarks Nationalbank added that most pension companies have room to invest even more in alternatives, if deemed appropriate in terms of risk and return.

However, it also stated that room for further investments in alternatives “is not unlimited”.

With the greater allocation to alternatives, the bank warned that strong management of short- and long-term risk was increasingly important due to the impact alternatives have on solvency and liquidity in times of large market movements.

“Liquid resources will constitute a smaller proportion of assets, while the growth in illiquid assets will increase the risk-based solvency capital requirements of Solvency II,” the report stated.

“In the long term, companies’ solvency and profitability will naturally be highly dependent on the performance of their alternative investments. Solvency and liquidity will thus require careful management, for example through the regular stress tests that companies perform.

“Using these internal stress tests to analyse a combination of liquidity and solvency in adverse scenarios will only become more important as the proportion of alternative investments grows.”

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