Denmark’s financial supervisory authority Finanstilsynet has criticised some of the country’s largest pension funds’ management of their infrastructure investments as “often inadequate”.
It demanded that the pension schemes’ boards “take greater responsibility for establishing a clear risk profile for the investments”, according to Finanstilsynet’s deputy director Carsten Brogaard.
The comments come following an investigation beginning in 2017 after the FSA was granted greater funding to oversee some of the pension funds’ investments in infrastructure. It had expressed concern about the “necessary skills in the pension funds” to invest in infrastructure.
The study released on Thursday contained inspections into eight pension funds, although three are part of the wider PKA scheme. The other funds inspected were PensionDanmark, Industriens Pension, Sampension, MP Pension and Danica Pension, with infrastructure accounting for about 3 percent of their collective investments. Infrastructure Investor understands they were chosen in part for the size of their allocations and also partially randomly.
Many of the primary concerns expressed by the investigation were around the risks contained within investing in infrastructure. While it noted the stable and secure revenues provided by assets such as PPP contracts, it identified more “volatile” investments such as gas supply affected by merchant prices, considering the risk corresponds more to private equity.
Additional concerns focused on the FSA’s belief that risk management processes applied to other sectors were not sufficiently applied to infrastructure investments.
“Most of the pension companies surveyed had shortcoming in risks and the assessment of the risk/return ratio, both in investment decisions and the subsequent monitoring,” the FSA stated. “In all pension companies, the Danish FSA considered that there were deficiencies in relation to measuring risks in the ongoing monitoring after the investment was made.”
The FSA had not responded to a request for further comment at the time of publication.
‘Members have attractive, stable returns’
The FSA released its individual assessment of each fund, with varying degrees of criticism.
PKA, which was noted for holding “operational responsibility” for several direct investments in wind farms, was also assessed for its investments “in infrastructure funds and co-investments with these funds”, where the FSA said the “investment policy and guidelines did not sufficiently determine the risk profile of this type of investment”.
PKA was among a trio of investors to rule out investing with Macquarie Group in October following a German prosecutor’s investigation into dividend trading. It had earlier last year bought Copenhagen-based telecoms firm TDC in a deal worth Dkr40.3 billion ($6.7 billion; €5.4 billion).
PKA declined to comment on the investigation’s specific criticisms, pointing to a statement in which it said it had generated a 10 percent return from its direct infrastructure investments, 6 percent on infrastructure fund investments and 4 percent from energy funds.
PensionDanmark was also censured, with the “desired risks for the company’s investments in infrastructure not sufficient, and therefore the risk profile set was deficient”.
PensionDanmark confirmed in 2017 it had written down an investment from 2010 in a 166MW offshore wind farm in Denmark following the end of its subsidy contract and its entrance into the merchant power market amid unexpected lower electricity costs.
The scheme also declined to comment on specific criticisms and said its infrastructure portfolio had generated an average 10.1 percent return over the last five years.
“The purpose of PensionDanmark’s investments in infrastructure is to ensure that members have attractive, stable returns in an investment environment characterised by very low bond yields and volatile equity markets. This objective has been met,” it added in a statement.
A source familiar with the investigation told Infrastructure Investor that the criticisms have been made somewhat retroactively after guidance for investing in infrastructure was published by the FSA last year as part of the investigation. There is consternation among some of the schemes that the funds have not had enough time to adjust their strategies to the FSA’s recommendations before the criticisms were published.
There is also a concern among some of the funds that the risks have not been clearly defined enough in the past, with greenfield offshore wind investments an example of one of the grey areas highlighted.
The FSA said it will follow up on the issues highlighted in future inspections.