Denmark Pension’s 2018 Ended Badly | Chief Investment Officer

One of Denmark’s top pension funds lost $567 million, or 3.2% of its investment portfolio, in 2018.

Slips in international stocks and interest rates rising in the US were the main hiccup driver for theATP fund, which now has assets worth 785 billion in Danish krone (DKK), or $119 billion. Much of that loss occurred in the fourth quarter.

The plan returned 5.8% in the first nine months of 2018, and 15% the year prior.

The fund’s interest rate-linked hedging strategy shielded it from further damage. The tactic adjusted rates to 3% after the discounting curve’s 40-year mark, which resulted in a DKK 3.1 billion loss as the fund moved money from the surplus to guarantee payments. However, this grew the hedging portfolio to DKK 693 billion from DKK 651 billion.

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Government and mortgage bonds and illiquid investments—like private equity, real estate, and infrastructure—made positive contributions to performance, but the portfolio had only gained a measly 0.8% with their help.

Mid-year life expectancy adjustments caused the firm to funnel DKK 20 billion out of assets and into its pension surplus.. Danes will now live an average of 81.2 years, which ATP said is increasing faster than expected. The firm had lost DKK 5.5 billion before the global life expectancy update occurred, which contributed to a red DKK 25.5 billion post update.

“After several years of stable, positive returns, the financial markets, especially toward the end of 2018, were marked by negative returns in the global equity markets and rising interest rates in the USA,” said acting chief executive officer Bo Foged, who added that after recent years of healthy performance, “it was to be expected that the high returns could not continue.”

He said ATP’s long-term investment horizon and balanced risk approach provided “a solid foundation” for keeping retirement benefits stable, but expects “moderate” returns in the near future.

Foged replaced Christian Hyldahl, who quit in November on accusations of a tax scandal at a former workplace. The former CEO had barely been with ATP for a year.

The fund’s investment portfolio has allocations across four risk factors: equity (40%), interest rates (34%); inflation risk (19%), and “other” risks (7%).

Tags: ATP, Denmark, Hedging, Life Expectancy 2018, Pension

The Pension Benefit Guaranty Corp. (PBGC) has agreed to withdraw its objection to the proposed sale of Sears’ assets to hedge fund ESL Investments, which cleared the way for a US bankruptcy court judge to approve ESL founder and Sears Holdings Corp. Chairman Edward Lampert’s $5.2 billion takeover of the 126-year-old retailer.

The agreement allows the government-sponsored lifeboat for struggling pensions to assume responsibility for Sears’ two pension plans, which are covered under PBGC’s Single-Employer Insurance Program.

Last month, the PBGC said it would assume responsibility for Sears’ two defined benefit pension plans, which cover approximately 90,000 workers and retirees at Sears, Roebuck and Co. and Kmart Corp. Sears filed for Chapter 11 protection in October, and the PBGC stepped in to become responsible for the plans because it said that Sears’ continuation of the plans is no longer viable.

According to court documents, the PBGC estimates that the Sears pension plans are collectively underfunded by approximately $1.4 billion, and have a funded level of just 64%. In its complaint, it had argued that as a result of the sale or liquidation of the company, the plans would not have assets available to pay benefits when due.

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Sears lawyer Ray Schrock reportedly told bankruptcy judge Robert Drain that the PBGC will receive an unsecured $800 million from the Sears bankruptcy estate. He also said the agency would get up to $80 million in proceeds from potential claims against ESL Investments Inc. surrounding its dealings with Sears.

The Wall Street Journal reported that as part of its settlement with Sears, the PBGC agreed not to challenge Lampert’s right to bid using $1.3 billion in debt instead of cash. It also said that a group of unsecured creditors argued that Lampert shouldn’t be able to rely on loans he previously extended to Sears when he used stock buybacks, spinoffs, and dividends to make money while stripping Sears of its assets.

The PBGC said that it expects its guarantees will cover the vast majority of pension benefits earned under the plans, and added that it will not have a significant effect on its financial statements because the claim has already been included in the agency’s fiscal year 2017 and 2018 financial statements.

Tags: Edward Lampert, ESL Investments, PBGC, Pension, Sears