Denmark’s e58.8bn pension fund, ATP, is taking on new risks in a bid to beat inflation. For years it was an equity and bond heavy fund with hardly any alternative investments, but in the past 12 months it has made significant moves into infrastructure and real estate. This is set to continue into 2008 and the fund has indicated it will soon tender for mandates in these asset classes.

With 4.4 million members (all Danes are required to be in the ATP) and 700,000 pensioners (eight in 10 Danes), the defined benefit scheme has some significant liabilities, but its solvency levels are solid. After abandoning its benchmarks and undergoing a rigorous process that began in 2001 to separate its alpha and beta assets, ATP now appears to be confronting its potential weaknesses. Chief investment officer, Bjarne Graven Larsen, believes these are low returns on equity and high inflation.

He says: “With our moves we are acknowledging that there is a certain kind of scenario where ATP will not do well, and those are related to scenarios with high inflation. We are vulnerable to situations like in the 1970s where we had bad returns on equities, and that is why we want more exposure to commodities and other asset classes. If we come into a scenario with high inflation we want to be able to cope with that.”

One of the fund’s more pressing concerns is a slowdown in US growth, especially with the possibility of a recession. Should there be a significant decline in the States, it will probably be the largest test for the fund’s strategy and changes.

Increasing exposure

Earlier this year the fund upped its exposure to commodities to €3bn, which a year ago was at zero. It has now allocated €8bn to the asset class. Most recently ATP announced it would allocate more resources to what it calls “inflation beating” investments, which it considers to be real estate and infrastructure. These moves have come mostly at the expense of short-term bonds.

Henrik Jepsen, the fund’s chief investment officer for beta, points out that this trend will continue. He says: “I believe this investment pattern will continue but it will be a steady plan, not stop and go. These types of assets have historically been a good hedge against inflation. We’ll be coming out with more mandates for them in 2008.”

At the moment its official asset allocation is divided into the actively managed €6.6bn alpha portfolio and the significantly larger €52bn beta portfolio. Combined, 27.9 per cent of the fund’s assets are in listed and non-listed equities, while another 58.6 per cent lies in fixed income. The remaining assets are 4.9 per cent in real estate, 4.1 per cent in private equity, 4.2 per cent in commodities and the remaining 0.4 per cent in what it calls ‘all weather’ investments.

However, Mr Larsen does not think that the allocation truly represents the risks the fund takes. For example, he says, the allocation to equities is at 27.9 per cent but the portion of risk taken by these investments probably equals 65 per cent. With fixed income it has a higher allocation but risk-wise, in Mr Larsen’s opinion, it is only about 10 per cent.

For the first three quarters of 2007 the fund’s investments posted a return of 5.3 per cent, a respectable figure in such a volatile market. Its best returns came from domestic equities at 18.3 per cent, while real estate and commodities also fared well. It predicts that its combined investments will return 6.6 per cent for 2007. Overall returns for 2006 were 4.8 per cent.

ATP’s CEO Lars Rohde acknowledges that it was a challenging year, but was pleased with the results. He says: “From an investment standpoint, 2007 has been quite a turbulent year. Our financial results are, however, very satisfactory. The bottom line shows a profit of e1.52bn and, thanks to the increase in ATP reserves, we are now able to raise present and future pensions.”

Denmark’s pension system topped the charts of a recent Aon survey after it praised the country’s solvency levels, regulation, generosity and sustainability. It was the second year in a row that the country came in first place in the survey.

The report read: “The key characteristic is that the majority of the pension structure is fully funded and based on employer or employee contributions. Coverage of first and second pillar pensions is almost universal and the demographics are also strong.”

Mr Larsen says he was not particularly surprised by the findings, pointing out that most Danes are covered with the amount they will receive upon retirement largely sufficient.

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