The Danish industrial workers' pension fund is looking at redirecting some of its DKK24.6 billion (USD4 billion) into over-the-counter and listed derivatives, according to DW sister publication Global Money Management. The pension fund, called the Industriens Pensionsforsikring, is looking at interest rate swaps, options, repos, stock lending and active currency management, according to Jan Oestergaard, head of investments in Copenhagen.
This is part of a trend kick-started by the Danish regulator changing the law in December to allow pension funds to use derivatives for active portfolio management, rather than restricting use to hedging risk. Hanne Hother, head of the Nordic region at Mercer Investment Consulting in London, said Industriens Pensionsforsikring is ahead of the curve in terms of preparing to implement derivative strategies. Oestergaard himself said, "I know several [other Danish pension funds] who are looking at the same things as we are." He declined to name the funds.
The pension fund wants to use interest rate swaps to closer match it liabilities with its assets. Pension payments in Denmark have guarantees, some of which are linked to interest rates, and swaps could hedge part of this risk. Swaps are also on the agenda at Juristernes og Økonomernes Pensionskasse, said CIO Jan Henrik Franck in Copenhagen, although the plan has not yet executed any trades. It opted for futures last time it hedged its interest rate risk, but plans to re-examine swaps next time.
Industriens Pensionsforsikring has discussed derivatives with several Danish and international investment banks. "We have not done any real business with anyone outside Denmark," said Oestergaard. But for some of the instruments it is considering, he expects the fund to pull the trigger on transactions with a few international banks and to select firms that offer the most support and education.
Stock lending and repos would add extra margin without introducing more risk to the portfolio, said Oestergaard. Active currency overlay should also increase the fund's risk-adjusted returns.
