ATP, the DKK710bn (€95bn) Danish statutory pension provider, has presented a new defence of its investment strategy, this time by comparing four different investment models alongside its own, and concluding that only its current approach meets the requirements of its own product.
In recent years, ATP has come in for criticism for its business model including its investment strategy — particularly given the 41% loss suffered by its risk parity-based investment portfolio in 2022.
Publishing the analysis today, the Copenhagen-based institution said: “The ATP pension’s role in the pension system is, together with the public pensions, to provide stable, predictable and lifelong pensions, thus ensuring a stable basic pension at an appropriate level for all Danes.
“That is why the ATP pension is designed as a guaranteed lifelong pension, just like the public pension,” it said.
The pension fund said it was a natural extension of this that ATP’s investment strategy was different from those used for a market-rate pension product, which was unguaranteed.
ATP said its analysis looked at how different investment strategies were expected to live up to ATP’s dual purpose of, firstly, always being able to pay out the guaranteed pensions, and secondly, aiming to secure the purchasing power of the guaranteed pensions – in addition to the built-in return of the guarantee.
The five strategies compared in the document range include three which utilise interest-rate hedging, and two which do not.
Of the three that are hedged, one is a 100% equities strategy with 15% volatility, the second is the same but with 30% volatility and the third is the risk-parity portfolio with 30% volatility and geared to achieve 200% exposure – representing ATP’s actual strategy.
The remaining two strategies analysed are both unhedged. One is a 60/40 portfolio of 60% equities and 40% bonds, while the other is allocated 100% to equities.
The results show that strategies without interest hedging are very likely to become technically insolvent within a 10-year period, according to ATP’s analysis, with the institution saying that in practice those approaches would not be possible for a product like the ATP pension.
Of the three guaranteed strategies, the risk parity-based strategy is shown by ATP to result in the highest likelihood of providing an annual bonus of 2% or more – even if it has only a 44.8% probability of doing so.
“The above analysis supports the fact that, for a product like ATP’s pension product, the chosen strategy is meaningful,” the pension fund concluded.
“This does not mean that a corresponding strategy will not be meaningful for other products. It depends on the purpose, and the obligations arising from that purpose,” ATP said.
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