Denmark’s financial watchdog has issued updated guidance for pensions and insurance firms on how they should be managing investment risks, particularly of their alternative, unlisted, investments.
Among the changes to its guidance, which was first issued six years ago, the Danish Financial Supervisory Authority (Finanstilsynet) has added a section on making sure alternatives are continuously valued, stressing this should happen promptly when there are big shifts in financial markets.
The FSA said that the updated guidance, entitled ‘Guidance on alternative investments and good investment processes in light of the prudent person principle’, contained its expectations for firms’ investment processes and fulfilment of the prudent person principle’s criteria of being able to identify, measure, monitor, manage, control and report on the risks associated with the investments.
“The focus is particularly on alternative investments, because companies have significantly increased the proportion of alternative investments in recent years, and because the investment case is often significantly more complex than for traditional investments,” it said.
Failure by pension funds to promptly revalue their alternative investments – such as private equity, infrastructure and illiquid credit – has been a bugbear for the FSA for some time.
The Copenhagen-based authority said the new changes it was making to its expectations were based on experience and dialogue it had had with the pension sector in connection with its supervisory activities since the guidance was first issued in 2018.
One of the changes being made concerned the ongoing valuation of alternative investments, including expectations for companies’ valuation models, the FSA said.
“The guidance includes, among other things, a section on how companies can ensure that alternative investments are continuously valued without undue delay when major shifts occur in the financial markets,” it added.
Another change focused on the interaction between the prudent-person principle and the proportionality principle, the authority said.
“The Danish FSA expects companies to consider which measures are sufficient to enable them to comply with the legislation, and that in their assessment of proportionality, they focus on the nature, scope and complexity of the investments,” it said.
The FSA said the proportionality principle could therefore be applied in connection with small investments in non-complex enterprises.
The new guidance applies from 1 January 2025.
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