Written by Matt Ritchie
Not-for-profit labour market pension fund PensionDanmark is growing in terms of assets and members, and has taken a proactive approach to meeting the challenges it faces in the current market. Matt Ritchie spoke to chief executive Torben Möger Pedersen about the fund’s strategy
In an environment where traditional approaches to pension provision are less effective than in the past, PensionDanmark is a fund unafraid to do things a little differently.
And the scheme’s more than 642,000 members appear to be reaping the rewards of a less conventional approach.
Persistently low yields and volatile equity markets following the global financial crisis presented challenges to pension funds everywhere. PensionDanmark chose to deal with the problem by allocating its assets elsewhere. It is now pursuing a strategy of allocating 20 per cent of members’ assets to what the fund calls “stable alternatives”, placing the assets 50 per cent each into real estate and infrastructure.
It is a strategy which, along with strong performance in the equity portfolio, helped PensionDanmark achieve a return on the investment portfolio of 7.1 per cent last year.
Denmark’s largest labour market pension company, and fourth largest provider overall, PensionDanmark has also maintained a sharp focus on keeping costs down.
The fund’s chief executive since establishment in 1993, Torben Möger Pedersen, says PensionDanmark aims to further improve its position as one of the most cost effective providers in the Northern European countries by cutting a further 25 per cent of its administrative costs in a challenging IT and systems changeover taking place this summer.
PensionDanmark is not-for-profit and co-owned by labour unions and employer organisations, associated with blue-collar and lower-wage white collar workers across the public and private sectors.
In addition to its predominant role as a pension provider, it also offers healthcare and insurance solutions, and financing for life-long learning initiatives.
All pensions are defined contribution, in other words there is no guaranteed income level at retirement.
“The fact that we don’t have any guarantees means that we are not restricted by the capital requirements in the European solvency regime. All investment risks are carried by the individual members with a high degree of freedom in the design of our investment policy,” Möger Pedersen says.
At the end of last year, PensionDanmark had around DKK 152 billion (approximately €20.4 billion) in assets under management, and Möger Pedersen says this is growing “quite rapidly”.
“In three to five years’ time we will pass DKK 200 billion in the portfolio. It won’t be until the 2050s before we reach break-even where pension outflows are equivalent to contributions coming into the system. So liquidity is not a great issue for us, the surplus contributions will easily finance all liquidity needs in the system for the next couple of decades.”
It is this position that offers PensionDanmark the opportunity to benefit from the illiquidity premium offered by its stable alternatives: infrastructure and real estate.
The fund favours making direct investments in energy-related infrastructure assets due to the regulated revenue streams and government subsidies or guarantees that often accompany such projects.
The approach has seen PensionDanmark establish itself as co-owner of five wind farms - two offshore developments in Denmark and three onshore investments in the US. PensionDanmark is also investing in the first offshore wind farm to be built in the US, and late last year announced it would take a 49 per cent stake in six UK assets via the Copenhagen Infrastructure I fund.
Other investments have backed gas and electricity transmission infrastructure, and a biomass plant to be developed in Lincolnshire, UK. Möger Pedersen says the fund focuses on North Western Europe and North America, in part due to political risk issues elsewhere.
“We don’t feel comfortable with making direct investments in Southern Europe or emerging markets, at least not yet. There are so many opportunities in North Western Europe and North America that we don’t feel the need to go into other regions for the moment.”
On the real estate side, PensionDanmark is focused predominantly on its home market but also has a small UK exposure through a real estate fund.
Möger Pedersen says the fund has the capacity to make direct infrastructure investments of around DKK 12 billion (approx. €1.6 billion) over the next four years, but it has had to build up significant internal capacity over the past five years to get to this position.
PensionDanmark now has a team of around 22 in its infrastructure division, and seven working on the real estate programme.
“These investments are very different from what pension funds are traditionally investing in – listed equities and different types of bonds – therefore it is necessary to build up internal competencies and other skillsets within the traditional portfolio management,” Möger Pedersen says.
“These stable alternatives, infrastructure and real estate, should provide us with returns substantially higher than yields on government bonds, but without the volatility associated with listed equity markets. We are looking for assets with a very low overall correlation to the overall business cycle. They give us a stable rock bottom in the portfolio, so we can use our risk budget on equities, high yield bonds, and other assets in that direction.”
While much of PensionDanmark’s effort has gone into establishing its stable alternatives portfolio, the fund still has substantial positions in the more conventional asset classes.
Just what proportion of a member’s fund is invested in which asset class is determined in part by age, as PensionDanmark takes a lifecycle approach to dealing with investment risk.
Under the age of 41, investors have 45 per cent of their assets in equities, 42 per cent in listed and 3 per cent in private equity. Investment grade credit accounts for 21 per cent of total funds, real assets for 17 per cent, and non-investment grade credit 17 per cent.
Risk is reduced significantly for members over 41, when the allocation to investment grade credit increases to 47 per cent. Equities account for 23 per cent, while 17 per cent is allocated to real assets and 13 per cent to non-investment grade credit.
“We roughly split the equity portfolio between two separate buckets,” Möger Pedersen says. “One we call stable equities, which are companies with a relatively low correlation to the business cycle, and a high quality bucket which is equities with a value type of flavour. Most of the equity portfolio is managed in-house, but we use a small number of more specialised, niche portfolio managers, with the likelihood to provide us with some alpha.”
The majority of PensionDanmark’s fixed income portfolio is invested in domestic government and mortgage bonds, and these allocations are managed in house. The majority of non-investment grade credit allocations are managed by external managers, and cover high yield, senior bank debt, emerging market debt and mezzanine funds.
PensionDanmark members are entitled to contributions of between 12 and 15 per cent of their initial wage, with the exact value subject to negotiations between unions and employers organisations. The majority is used for savings for pensions, a small part is for products such as death insurance, disability insurance, and some healthcare products.
PensionDanmark currently provides benefits for a cost of around DKK 370 per year per member (approx. €40.8), but the company intends to reduce this to DKK 300 in part through a “very challenging” in-sourcing project to be undertaken in summer.
While a lot of the company’s IT will continue to be handled by third parties, it is establishing an in-house IT based administration management system which it expects to further lower costs for members.
Another initiative will see greater “data cooperation” between PensionDanmark and public bodies. Möger Pedersen says this will enable a more proactive approach to engagement, where PensionDanmark can be notified upon a change in members’ circumstances and react accordingly rather than wait for members to notify them.
“We have turned the traditional relationship between member and pension fund upside down,” he says. “You can be sure that you will always get what you are entitled to because we are monitoring your life situation and we will contact you when it’s relevant for you and your family.”
This approach also extends to PensionDanmark’s other services. An active collaboration with Denmark’s health service ensures the fund is notified in cases where members have a critical illness so they can promptly receive the relevant insurance.
The fund runs a large healthcare programme alongside an outsourcing partner, offering free member services including physio-therapist and chiropractor visits through 120 local healthcare centres. PensionDanmark expected to offer around 250,000 treatments through the centres last year.
“We encourage members to use these services to prevent them from being more seriously ill,” Möger Pedersen says. “Our members are hard-working blue collar workers, builders, drivers, cleaning industry people. It’s very important they have easy and free access to relevant health services.”
Möger Pedersen says that the labour market pension fund benefits from its ownership structure in pursuing its goals.
“Representatives from unions and employers’ organisations constitute the majority of our board. They are very engaged in the development of the fund, both monitoring the investment processes and allocation decisions but also dealing with member services,” he says.
“We see being industry owned and non-profit as a great opportunity because we can have a perfect alignment of interest between members and the management team.”
Written by Matt Ritchie