Investor Profile

Stopping traffic: Bankpension’s solvency strategy

As markets turn south, remaining solvent is the biggest challenge facing Bankpension, Denmark’s 1.6 billion (US$2.1 billion) pension fund. Chief investment officer Leif Hasager talks to Kristen Paech about the measures the fund has introduced to protect against downside risk.

Bankpension, the Danish pension fund for employees in the financial sector, is subject to strict regulatory requirements comparable to those applicable to a life insurance company.

These requirements, known as the “traffic light” system, are set out by the financial regulator, the Danish Financial Supervisory Authority (DFSA), and monitor the solvency of institutions.

The DFSA introduced the traffic light system in 2001 following the crash in the equity markets. The tests work on two basic scenarios: a “red light” under which pension funds must be able to take a 12 per cent decline in equity prices and a 0.7 per cent change in interest rates; and a “yellow light” where pension funds must cope with a 30 per cent fall in equities and a 1 per cent change in interest rates.

Late last year, the regulator requested life insurance companies and pension funds file further “extraordinary reporting” related to solvency and buffer levels, following continued turbulence in the markets.

Leif Hasager, chief investment officer of Bankpension, (pictured) says the regulator’s most recent requirements reflect the “red light” scenario.

When asked about the biggest challenges facing the fund in 2009, he says: “First and foremost, staying solvent; that’s number one. Number two is sticking to a long-term strategy, so that in the end when markets recover we are still well positioned.”

However Hasager says Bankpension is in “fairly good shape”.

“We are more or less immunised towards interest rate changes and if we look at all assets that are not interest rate sensitive (which is approximately half), we could sustain at least a 20 per cent drop in those assets without problems,” he says.

“We have a few complete write offs but I’d say the major part of our portfolio will bounce back sooner or later, so it’s short term very painful but longer term I’m not too worried about it.”

The fund offers four investment options to members, three of which offer “conditional guarantees” and one which offers an “unconditional guarantee”.


The conditional guarantees can vary according to interest rate conditions and other factors, while members pay a substantial premium for the unconditional guarantee.

The unconditional guarantee promises investors a return of 2 or 3 per cent, depending on when they joined the fund.

Approximately 50 per cent of the fund’s members and capital fall into the default fund – investment profile two – which has 50 per cent invested in bonds and real estate and 50 per cent in equities and equity-like investments.

About 10 per cent of members are in the high-risk option (profile four) and less than 2 per cent choose the bond-heavy strategy (profile three). The remainder (around 38 per cent) are in investment profile one, which has the same asset allocation as profile two but offers the unconditional guarantee.

Recently, Bankpension decided to hedge the downside risk in its unconditional guarantee option (profile one) by introducing interest rate hedging.

Hasager said the fund may make further adjustments to the profile later this year, once new rules on bonuses and solvency requirements are published.

In addition, Bankpension has formed a “strategic co-operation” with individual pension company letpension to establish a joint management company.

Under the terms of the agreement, the entities will remain separate but will share resources across the administrative functions.

“letpension is a fairly new company that is starting to sell life insurance policies to the financial institutions’ clients, so it’s not the employees, it’s the clients of the banks,” says Hasager.

“In that sense there’s no overlap between our customers and their customers, but of course we have the same financial institutions to service to a very large degree so that was the main reason behind this strategic co-operation. Of course, we see it as an opportunity to achieve more benefits of scale in the future.”

Bankpension provides pensions for 14,000 members across Denmark’s financial sector, predominantly small banks. The fund offers four investment options to members, three of which offer “conditional guarantees” and one of which offers an “unconditional guarantee”.

Asset allocation (30/11/08)

Derivatives 3%
Danish fixed income  32%
Emerging market bonds  4%
High yield bonds 8%
Developed market equities 21%
Emerging market equities 9%
Private equity 9%
Real estate  14%

Performance summary (2008)

Investment profile 1 -23%
Investment profile 2 (default)-23%
Investment profile 3 -8%
Investment profile 4 -33%


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