ATP has an overall investment strategy that takes into account that we need to provide guaranteed and lifelong pensions to our members no matter what interest rates do and how the life expectancies of our members develop and that we need to make every effort to ensure the real value of the pensions that are paid out.
The members’ mandatory contributions are divided into a so-called guarantee contribution and bonus contribution, where the guarantee contribution amounts to 80 per cent and the bonus contribution amounts to 20 per cent.
While the guarantee contribution is used to ensure that the individual members get a lifelong and guaranteed pension when they reach the retirement age, the bonus contribution serves to ensure the inflation--adjusted value of the lifelong pensions over time and to cover unforeseen events that might impact ATP, such as higher life expectancies.
The funds from the guarantee contribution and bonus contribution are invested dependent on which role they play:
For the majority of the funds - the guarantee contribution of 80 per cent - we take virtually no risks. These funds are invested in bonds and interest rate swaps so that we can be sure that we are able to pay the guaranteed lifelong pensions to our members when they reach the retirement age.
For the second and smaller proportion - the bonus contribution of 20 per cent - we invest in high-risk asset so that the returns over time can contribute to ensure the real value of the pensions. All in all, the invest strategy has a balanced risk profile in relation to achieving our objective.
Changes to the business model
For ATP’s Supervisory Board and management, the top priority is to continually ensure that the business model is contemporary and appropriate in terms of the objective of ensuring that our members get the best possible lifelong pensions.
Therefore, in recent years we have worked on optimising the pension product and business model. This has resulted in the business model being optimised in two areas: life annuity with market exposure and a change to the hedging strategy.
The first optimisation: Life annuity with market exposure
We will preserve the overall principles of ATP’s business model so that 80 per cent of the members’ ATP contributions - also called the guarantee contribution - are still allocated to pension accruals and guaranteed in terms of life expectancy.
From and including 2022, however, we will divide the guarantee contribution of 80 per cent into two parts for the members who have more than 15 years to go until they reach the state retirement age in order to achieve what we expect to be higher guaranteed pensions over time.
In the new model, 20 per cent of the guarantee contribution - the market contribution that we call ‘life annuity with market exposure’ - will be based on the returns that can be achieved by investing with a higher risk profile. By investing the market contribution with a higher risk profile, it is expected that over time this will result in higher returns and thus higher pensions.
The second optimisation: Changed hedging strategy
With the adjustment of the Danish ATP Act from 2021, it became possible for ATP to change its hedging strategy for the purpose of increasing the total investment returns while at the same time continuing to guarantee the lifelong pensions with a high degree of certainty.
The changed hedging strategy is intended to allow ATP as a pension company to get the best of two worlds: Providing higher returns and also preserving the underlying guarantees.
The change means that the total investment risk is higher, as in addition to the existing interest rate hedging of the guaranteed pensions, there is also added some assets with higher risk profiles and thus higher expected returns for the hedging.
This means that we can expect higher returns from the hedging portfolio. It also means that the expected additional returns over time can contribute to increasing the bonus potential and thus the bonuses that are paid out.
The hedging strategy will be implemented over the course of 2023.