Danish Regulator Ups Alts Reporting Requirements

Pension funds will have to disclose hedge fund, private equity, and infrastructure exposure on a quarterly basis as Denmark grapples with “prudent person” guidelines.

Denmark’s financial regulator is to impose strict new reporting requirements on the country’s pension funds to monitor their exposure to alternative sectors such as infrastructure, private equity, and hedge funds.

It follows concerns raised by the Copenhagen-based Financial Supervisory Authority (FSA) in February that some pensions did not have sufficient internal resources to adequately monitor their exposure to these asset classes.

The FSA is to require pension funds to report their exposure to alternatives on a quarterly basis, according to Bloomberg.

“The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”—Jan Parner, Danish Financial Supervisory AuthorityThe rule change also comes as Denmark grapples with the so-called “prudent person model”, which is proposed to be rolled out across the European Union in 2016. The model is part of the Solvency II set of rules primarily aimed at insurers. It allows investments to be made without specific limits, but Jan Parner, the FSA’s deputy director general for pensions, told Bloomberg the definition of a “prudent person” was not yet sufficient.

Denmark is ahead of the game, having implemented a version of the prudent person model, but Parner said: “[Danish] funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is.

“The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”

Parner emphasised the regulator was “not saying no” to alternatives exposure, but voiced a concern that funds could underestimate risks. Parner cited credit risk in particular, “which is cyclical and which funds haven’t previously had”.

FSA research, published earlier this year, reported that Danish pensions had invested roughly 7% of their assets—equivalent to about €152 billion—in alternatives, but the top 10 biggest pensions make up 90% of all alternatives ownership.

The Danish pension industry has been at the forefront of innovation in alternative investment, particularly in infrastructure. Earlier this month a group of eight Danish pensions joined forces to back a €1 billion infrastructure fund.