Danish pension fund ATP will expand its operations into the United Kingdom, and the new head of its UK operations, Morten Nilsson, says they can offer a more diverse range of investments and better risk controls than what is currently available to many British pension fund members.
It is ATP’s first foray into a foreign market and Nilsson (pictured) says the expansion is timed to coincide with reforms to the UK pension system. One of these changes will require employers to auto-enrol their workers into a chosen scheme.
Currently, members who don’t enrol themselves are at risk of missing out on pension benefits.
“The UK is interesting for many reasons, but also because it is a huge reform process and both private and public pensions are being reformed quite significantly,” Nilsson says.
“What got us interested is that it is a big country and a stable country, but it is in a huge reform process; and when we then started to dig with our market analysis we found there are more than 46,000 DC [defined contribution] schemes and there is clearly a need for consolidation.”
ATP will aim to provide lower cost pensions with the economies of scale advantages of a larger pension fund, says Nilsson.
“We have seen a lot of interest from the market and that is part of it, and we are seeing the same trend; and there is a need for simple, cost-efficient products and handling some of the risk for the individuals,” he says.
“Looking inside our fund, we have a lot of scale advantages to offer clients in the UK and as we are successful we will be able to bring that scale back to our Danish operations.”
Titled “Now:Pensions”, ATP’s pension fund will be an independent, multi-employer fund.
Administratively, Nilsson says that ATP is used to handling a large number of employees, ranging from both large companies to small business employers in Denmark.
Other than some sovereign fixed-income investments that will remain British, the members of the new UK-based fund will have access to the same full suite of investments as the 45 million members of ATP.
Nilsson says many British funds have conventional 60 per cent equities/40 per cent bond portfolios that are not benefiting from the new financial instruments and investment approaches that could provide a better risk/reward structure.
“Our core investment portfolio is highly diversified and is based on risk allocation, so we don’t have a portfolio where equity dominates,” he says. “It is a portfolio where we are invested in five different risk classes going from commodities, credit, inflation, rates and equities – so it is broadly diversified.”
ATP has two main portfolios: a hedge and an investment portfolio.
The hedge portfolio is designed to hedge ATP’s pension liabilities as efficiently as possible to offset changes in interest rates. The portfolio mainly comprises interest-rate swaps and long-dated bonds.
The investment portfolio is split into two: an alpha portfolio and a beta portfolio.
Most of the assets in the investment portfolio are held in the beta portfolio, which is divided into these five so-called risk classes.
The fund has a total risk budget for the beta portfolio, which it uses to review the various investments as often as daily.
As of June 30 this year, ATP allocated 13 per cent of the total beta portfolio to equities and calculated this represented 36 per cent of its total risk budget.
Credit had a 12 per cent allocation and made up 7 per cent of risk; interest rates had a 43 per cent allocation and 21 per cent of the total risk budget. Commodities represented a 2 per cent allocation and 9 per cent of risk; and inflation 29 per cent asset allocation and 27 per cent of the total risk budget.
“In an economic environment as we have now, where the key word is uncertainty, in our view the best thing you can do is diversify and really focus a lot on preserving your capital,” Nilsson says.
ATP also uses an absolute return target that is linked to the liabilities of the fund.
The approach differs from conventional benchmarking that can tend to over emphasise risk in relation to the adopted benchmark and not focus enough on the risk in relation to reserves.
Nilsson says this absolute return approach also makes the fund more agile in its decision-making processes.
“What we have seen is that we are not bound by benchmarks and we can focus on very robust processes and shift our portfolio very quickly; and we saw in 2008 we were liquid enough to do some really interesting investments when most pension funds were completely unable to do things like that,” he says.
The board of trustees will begin operating in 2012 and consists of former Sainsbury’s group human resources director Imelda Walsh and John Monks, who is a member of the House of Lords and former General Secretary of the European Trade Union Confederation and the Trades Union Congress.
Other members of the board of trustees include former government actuary, Christopher Daykin, former shadow pensions minister Nigel Waterson and ATP Group chief executive officer Lars Rohde.