Denmark’s largest pension fund, the E33.4bn labour market supplementary scheme points out three attributes it feels make it stand out from its Danish contemporaries. It lists its overall asset allocation, as determined by the asset liability study, its risk management and compliance framework and a recently-introduced corporate governance policy.
In 1999 it undertook a thorough overhaul of the fund’s approach and launched a long-term project designed to bridge what was seen as a gap between the investment managers and the fund itself. Emphasis in the past couple of years has predominantly been on the asset management side and the allocation of assets between investment types is typically now more important than picking the exact investments.
The fund’s chief executive now oversees four departments. Fifteen members make up the equity division and oversee the equity and corporate governance strategies. The fixed income division comprises nine who look after the strategy, macro analysis, currency hedging and the asset liability analysis.
A further nine in the securities management department oversee performance and risk management, reporting and external portfolio agreements. Finally, there is one member overseeing private equity investments.
With regard to ALM modelling, ATP points out that, although it is common practice worldwide, in Denmark only a few companies use it to determine overall asset allocation. As to why it places such a premium on ALM studies, it lists various reasons. It believes the asset allocation between classes is vital for the long-term risk/return ratio; assets and liabilities are correlated and both therefore have an impact on the optimum allocation; and ALM studies offer a structured approach to the overall asset allocation while at the same time providing a consistent basis for determining the asset allocation.
Analysis is based on historical risk and returns from equities, bonds and other assets, while at the same time taking into account the fund’s commitments. ATP believes that this ALM approach takes into consideration the covariance between returns on various investment types, as well as the potential risk that pensions turn out to be smaller than expected.
ATP’s board assesses the overall asset allocation once a year. Unsurprisingly, ATP says that any major structural changes in financial markets or in pension commitments will have a bearing on the overall asset allocation. For example, when the board drew up the investment strategy for 2001 it took into consideration amendments by the Danish parliament made at the end of last year. Changes to the taxation laws and a raising of the maximum equity allocation to 70% have both affected the present and projected asset allocation weightings.
Over the past two years, ATP says it has altered its approach towards risk management. Once a year the board defines the overall portfolio allocation, sets specific risk limits and subsequently adopts a specific benchmark by which to measure the annual return on assets.
An investment framework specifies limits beyond which the sub-portfolios are allowed to deviate from specific targets. It also specifies certain acceptable limits for the interest rate sensitivity of the nominal bond portfolio. The limits set and the portfolio targets are shown in the table.
In effect, the board lays down certain parameters for the portfolios at several levels including overall asset allocation and transaction limits for each manager. ATP says this ensures consistency at all levels of the investment process – between overall long-term considerations, as expressed by the board’s portfolio targets and objectives, and short-term expectations for developments in financial markets.
In addition, it believes this framework ensures a clear allocation of responsibilities in the decision-making process and eases any follow-up on investment decisions.
The third attribute is its corporate governance policy, introduced at the end of last year. The fund says it attaches importance to helping the companies it has invested in to enjoy the lowest cost of capital and maximum competitiveness, to the benefit of all its shareholders and other stakeholders.
The fund strives to ensure equal treatment of all shareholders and to see that incentive schemes are in the best long-term interests of the shareholders. ATP says that voting with one’s feet is feasible as far as foreign investments are concerned, but limited at home due to its significant market share. In other words, the fund exercises corporate governance in the Danish equity market as a means of protecting investments and maximising returns.
Finally investment cost, something ATP maintains is modest by both Danish and international standards. Total costs associated with the investment process amounted to DKK26m in 2000, equivalent to just under 0.011% of the assets or DKK6 for each member.

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