Danish pensions told to ‘jump’, just not ‘how high’

No one disputes the regulator’s role in ensuring Denmark’s pension funds invest responsibly. But the lack of clarity over specific requirements isn’t helping anyone

After Denmark’s Financial Supervisory Authority issued a report in January chastising eight pension funds for “shortcomings” in managing their infrastructure portfolios, we thought it would be a good idea to get more specifics regarding the regulator’s findings.

However, we quickly discovered that further details were hard to come by. One lawyer, who told us upfront that he was advising some of the pension funds involved, complained that the FSA’s language is “so generic that it’s difficult to pinpoint any specific area”.

Given who our source’s clients are, one might take that comment with a pinch of salt. Unfortunately, the FSA’s response only seemed to confirm what the lawyer had to say. Per Plougmand Bærtelsen, assistant director general of the regulator’s life assurance division, told Infrastructure Investor: “I don’t think that I can specify, because we have tried to be specific as we could.”

Asked whether the FSA felt the eight funds had been doing a poor job of assessing their infrastructure portfolios’ risk-return profiles and of monitoring their investments on an “ongoing basis” – criticisms the regulator applied to most of the funds that were audited – Bærtelsen still demurred. He instead emphasised the need for the pension funds to understand the risks they were assuming and to define the types of returns they were expecting to achieve.

Yet looking at the performances of some of the eight pension funds, we were unable to find evidence they had failed in this regard.

For example, PKA, which had three of its pension funds audited, generated average returns of 10 percent on its direct infrastructure investments and around 6 percent on its infrastructure fund investments between 2013 and 2018. Pension Danmark’s infrastructure investments returned 10.1 percent over the same period.

No ‘red flag’

After we drew Bærtelsen’s attention to these figures, he acknowledged that no ‘red flag’ had prompted the inspection, which began in September 2017. He said the probe had come in response to the increase in allocations to alternatives (excluding real estate) and infrastructure, which by mid-2018 stood respectively at 11 percent and 3 percent of pension funds’ total AUM.

The FSA was also unable to define what it meant by an “ongoing basis”. “We haven’t set up a specific frequency,” Bærtelsen admitted. “But we would say that every time the risks [change] – if, for example, you have identified that an investment is interest rate-sensitive and you have significant interest rate changes – then you should of course re-evaluate.”

As one lawyer told us, the pension funds would argue that they are already in compliance: “There is a feeling there is uncertainty there.” We get the same feeling.

What both the lawyers and the FSA did agree on is that they believe – and hope – that the inspection and subsequent recommendations will not have a negative impact on pension funds’ appetite for infrastructure. Both sides confirmed that the regulator is speaking with each of the eight pension funds – which, alongside PKA’s three funds and Pension Danmark, comprise Industriens Pension, Sampension, Danica Pension and MP Pensions – to enable them to comply with the FSA’s recommendations.

To be fair to the watchdog, one of the lawyers acknowledged that the FSA was not trying to be “malicious” and was simply looking to improve standards. Still, a bit more clarity about what it wants pension funds to do with respect to their infrastructure investments would be in the best interests of all concerned.

At the moment, it feels as though the FSA is telling pension funds to ‘jump’. But when they ask ‘how high?’ the answer seems to be ‘as high as necessary’. We think the regulator can – and should – do better.