Denmark’s AkademikerPension has been criticised by the Danish FSA (Finanstilsynet) for failing to adequately document elements of its alternative investments management, and has been handed eight official orders to correct procedures.
In a statement published yesterday, the FSA said it had carried out an inspection at the DKK165bn (€22bn) pension fund in January this year around its alternative investments, excluding real estate.
The supervisor criticised various aspects of the pension fund’s handling of its alternatives investments, to do with administrative procedures as well as model governance.
The FSA said: “The pension fund’s written procedures and documentation regarding the ongoing identification, measurement, and monitoring of risks – as well as model governance concerning alternative investments – were found to be inadequate,” adding that this posed a risk of insufficient risk management.
“Furthermore, a significant portion of the workload was concentrated among relatively few employees, which increases the risk associated with the execution of these tasks,” it said.
This criticism gave rise to one of the official orders, with another instructing the pension fund to ensure the board’s policy on operational risk specifically addressed model risk regarding models used in the risk management of alternative investments – taking into account the materiality, quality, and complexity of each individual model.
Under a further order, AkademikerPension was told to tighten up procedures around the incorporation of relevant risk premiums into the required rate of return model, with the watchdog having found documentation to be inadequate, which it said created a risk of the pension fund’s required rates of return failing to sufficiently reflect the total risk of investments.
“This could impact both investment decisions and the subsequent management of those investments,” the FSA added.
In recent years, AkademikerPension’s allocation to alternatives had been close to the average for Danish pension funds, at around 14.5% of total assets at the end of last year, according to the FSA.
In response to the conclusions from the FSA, AkademikerPension said: “These orders do not imply that AkademikerPension has made incorrect investments, nor that members’ savings are at risk.”
“Rather, the orders primarily concern documentation, processes, and the governance of the models and procedures used to identify, measure, and monitor risk,” it said.
In the statement on its website, the pension fund said it took the orders seriously and had started work to comply with them.
“Within the established deadlines, AkademikerPension will submit reports and documentation to the FSA detailing how the orders are being addressed,” it noted.
Over the last few years, the Danish FSA has had a particular focus on the handling of alternative investments – unlisted assets such as real estate, infrastructure, private equity and private debt – by the entities it supervises, including pension funds.
Much of that focus has been around valuations of alternatives, which have made up increasing proportions of pension fund portfolios in recent years.