The Copenhagen-based Industriens Pensions has an impeccable background as a labour-market fund. Formed just over a decade ago, in a pioneering joint venture move by DI, the Confederation of Danish Industry on the employer side and by CO, the central grouping of trade unions, it covers employees in 8,500 businesses across the country. In November it won the Country Award for Denark at the IPE Awards
The members total 316,000, of which 210,000 are reckoned to be active. “ In membership terms, we believe we are the biggest single pension scheme in Denmark today,” says Industriens chief executive Erik Adolphsen. The scheme is mandatory.
“Ten years ago we had contribution inflows of DKr300m (EXXXm) and funds of DKr300m at year-end, or a bit less when life cover costs are deducted. Currently our expected income is DKr4.6bn and assets at DKr23bn,” he points out. “This build up is possible due to the low average age of members, at 39 years.”
In premium inflows, the fund, which is structured as a limited liability insurance company, is already the fifth biggest in Denmark. The total contribution rate has increased to over the period to 9% of pay, but there moves afoot to raise this further. So with a youngish membership and strong cash flows, the fund can certainly think long term.
Nonetheless, the approach to asset allocation developed slowly, he explains. “We started in a cautious and safe way. It was bonds only at first, and then we added equities over time.”
Its strong financial position meant the fund was able to stick to its equity positions in the past few years. “Many other funds ran away from equities, because of solvency problems, which we did not have. We have not sold any equities during this time. This means that in 2003, we had returns of xx%,” says Adolphsen. “You will not get these returns with a bond portfolio.”
Some of these funds, he acknowledges, will have done better than Industriens over the two years to end 2002. “Our return in 2003 is well above 11% and tis is much more that our losses in total of less than 3% in 2001-2002.”
During 2003, the fund had around 30% in equities, he says. Most funds are well below this – some perhaps down to as low as 10%. “If interest rates go up with economic recovery, then you are doomed to have bad performance overall. This could be like ‘Catch 22’ for some pension funds. It is very hard to recover from this conservative position.”
The fund’s overall position was 32% for Danish fixed income, with emerging markets and high yield bonds accounting for 28%, 7% indexed bonds, with 11% Danish and 19% foreign equities and the balance in cash. “The 2% in private equity we invest indirectly, as we cannot add any value ourselves here,” he adds.
“The only real estate we have is our office building which we bought in 2002. But we do plan to start investing in the asset class, in the next two years. The reason why we have not done so is that you need a reasonable portfolio for a start. If you are going to do it, you have to do it properly,” says Adolphsen.
“Our investment policy we take from Hans Christian Andersen – “never put all your eggs in one basket.” From the outset, the fund diversified on asset classes and for external managers, and uses Nordea, Fidelity, Pictet, Invesco and AXA Rosenberg on the foreign equity side. For non domestic bonds, it has Morgan Stanley and Pictet for emerging markets and T Rowe Price for high yield. “We use amongst others, Danske Bank’s private equity arm Danske PEP, Bankinvest, AXA and Frank Russell, for private equity.”
The fund makes a point of publishing all its investments since the very first year of operations in 1993, including all equity holdings. “This we do now on our website,” he says.
“Our intention is to publish everything about our business. So if we make a bad investment, people can criticise us and tell us what to do better. Our record has been good so we can stand by what we are doing. This is very important in a pension scheme where people have to be members. If you cannot vote by leaving, it is up to us to be open.”
The fund had buffers that helped it get through the difficult times – when under the regulatory traffic light system, funds had to respond if their solvency positions moved from green zone to yellow or red. Industriens went into the yellow zone only for a short time. With a guaranteed return rate of 2.5% on half of its liabilities, the fund’s problems were never as severe as elsewhere.
The positive cash inflow already enables the fund to redistribute to assets using its new money, as it did in recent years to emerging market and high yield bonds. During this period it was not allocating new money to equities. “This is why we could maintain our equities. And we never had to sell anything to invest in new assets with a cash flow of DKr3bn annually,” he says.
“Our intention is to increase the equity content, as we are positive about equities, but we may have seen the best short-term. Last year Danish equities have done very well as did foreign, so how much potential is there?” Either way Industriens will not be affected by the current limits on equity holdings of 50% for some time to come. “We do not feel we are being curtailed by any limits.”
Adolphsen recalls: “Some pension companies were up to 50% some years ago and looking for an increase beyond the legal limit. A number wanted to go up to 70% - today some of these are down to 19%!”
Other possible sources of alpha are being explored. “We are looking at other areas, such as currency overlay as to how it should be done. We did well in 2003, by hedging against the dollar. Securities lending we have not looked at – not common in Denmark, the rules are not conducive to a market.”

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