Since January 2002, Pacific Investment Management Co. has won $550 million in new mandates from Danish institutions, said Peter Lindgren, director of business development for PIMCO, London.
And T. Rowe Price Associates Inc. estimates it has won around $1 billion in new business since the beginning of 2002, said Fleming Madsen, head of Nordic region for the firm.
This asset allocation shift might seem a far-sighted investment strategy in hindsight, considering most pension schemes in Europe's largest markets spent most of 2002 rebalancing their existing portfolios, investing money in falling equity markets.
But Danish pension plans' penchant for bonds is the result of what plan executives consider extremely strict solvency and accounting requirements imposed by the Danish regulator in the past two years.
Effective this year, local pension plans will be required to report assets and liabilities on a marked-to-market basis. Since 2001, pension plans also have had to build up reserves able to withstand a 30% fall in equity prices and a 1% rise in interest rates. Plans without sufficient reserves are kept under observation by the regulator and have to regularly stress test their investment to ensure their asset allocation will absorb a certain fall in equity prices and interest rates, to fulfill additional solvency rules.
A large number of pension plans have been unable to meet the regulator's solvency tests and are talking with the regulator about management of the pension plan, she said.
Insurers and pension plans most likely to be in trouble are those that guaranteed annual returns of 4% to 5% to their members, Ms. Hother added.
These factors forced executives of local pension plans to reduce their equity allocations to levels far lower than they would like.
Leading pension plans such as the €32.8 billion ATP, the Danish Labor Market Supplementary fund, Hilleroed, would rather invest more in equities.
In its 2002 annual report ATP, Denmark's largest plan, said it would reduce its equity portfolio to 25% of total assets in 2003 as a result of the new accounting rules. In 2002, equities were as high as 45% of assets, falling to 30% at the end of the year. The balance of the assets is invested in fixed income and property.
"ATP analyses indicate that the long-term portfolio allocation should include 45% to 50% equities to strike the optimum balance between risk and return," directors said in the annual report.
ATP officials did not return calls by press time.
Sources close to the market say they do not think the Danish regulator intends to ease the current restrictions in the immediate future.
The high levels of fixed-income exposure are likely to remain in place as long as the regulator maintains its current solvency testing system, said Mercer's Ms. Hother.
Mr. Madsen of T. Rowe Price said he expected risk classifications of some asset classes to be adjusted within the solvency tests but does not expect the regulator to abandon valuing pension plans on a marked-to-market basis.
Recent rises in the equity markets have given local pension plans a little more leeway to increase and diversify their equity portfolios, he added. "Pension plans are thinking about getting back into equities," he said.
In contrast to the flurry of activity among Danish pension plans, plans in leading European markets spent most of 2002 sticking to their prescribed asset allocation and buying equities in order to rebalance their portfolios despite falling markets.
