The entity that regulates Denmark’s financial system has announced plans to tighten oversight of alternative investments made by pension funds.
The move comes as regulators in the Financial Supervisory Authority have reported an uptick in risk, illiquidity and opacity in pension investments. From Bloomberg:
The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report.
The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016. The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions.
“The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”
Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.
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Danish funds and insurers have overestimated the value of alternative investments they made while failing to adequately account for the risks, the FSA said in a February report.
Pension funds held 152 billion kroner ($26 billion) at the end of 2012, or about 7 percent of their balance sheets, in equity stakes and other assets sold on markets the FSA characterized as illiquid, opaque and thin. The agency said they need to account better for those risks and ordered reports from the third quarter. PFA, Denmark’s biggest commercial pension fund, said today it invested in a shopping mall in western Denmark as part of a strategy to increase its presence in retail properties.
Denmark’s pension systems hold $500 billion in assets, collectively.
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