Pension funds consider increasing in-house asset management

As the new CEO of P+, the administration company for pension funds JØP and DIP, Søren Kolbye Sørensen has plenty on his plate. One of the first tasks is to examine the possibility of increasing internal investment management at the cost of external asset managers.
Photo: Jyllands-Posten
Photo: Jyllands-Posten

JØP and DIP, which manages pension funds for lawyers and economists, and civil and academy engineers, respectively, are considering outsourcing a smaller part of their investment activities than at present, leaving the work to its internal investment team instead.

Søren Kolbye Sørensen took over as CEO of the two pension funds’ administration company, P+, a month ago, and he has already compiled a list of things to look at in his first year in charge.

A part of his plan is to decrease the pension funds’ use of external asset managers and instead leaving investments to the in-house team to a larger extent.

"We are currently evaluating whether or not to bring part of the external asset management back home," he says, pointing to two reasons for the considerations:

"One is a cost element. It’s relatively costly to outsource management. Moreover, we believe we can create a better return on our own in some areas. But there will definitely be areas where we don’t have the necessary skills or enough critical mass to handle management ourselves."

Finding the cut

While the tendency fifteen years ago was to leave investment decisions in the hands of external asset managers, an increasing number of players are now upgrading internal investment teams. As reported by FinansWatch earlier this year, it is a process that a number of pension funds, including Industriens Pension and Pensiondanmark, have been through.

As was the case for Industriens Pension, the considerations for JØP and DIP are due to the funds reaching a certain capacity, so it now makes sense to insource investment management. They will initially look at alternative investments.

"We are not geared to invest directly in windmill activities. Others do that, but they have also been forced to increase their workforces, because it requires a whole different set of skills," Søren Kolbye Sørensen says, adding:

"It’s all about finding the right cut regarding what to keep in-house and what to outsource. It’s not a problem when things go well. But when things start to go wrong, it requires a disproportionate level of resources. Our basic philosophy is to take it step by step; to take small steps in the right direction and continuously improve."

At the helm of the JØP and DIP investment team is investment director Mikkel Svenstrup, who joined P+ on January 1st following a spell as head of Nordea Markets’ Institutional Structuring unit where he advised a number of pension funds.

A number of injunctions

Another of the challenges Søren Kolbye Sørensen faces in his new job arrived in December last year in the form of an inspection report from the Danish Financial Services Authority (FSA). In this, the FSA criticized JØP for using a subscription basis that did not consider the improved life expectancy of its members.

"This gives members the impression that a higher pension will be paid compared with a prognosis based on a realistic life expectancy where improvements in life expectancy are included," the FSA wrote.

Although it led to a total of five injunctions from the FSA to JØP, Søren Kolbye Sørensen – just as his predecessor Torben Visholm – does not see it as a particularly negative report.

"No, not compared to what you normally see. When you look at the various inspection reports, it is clear that there are different ways of expression in the various offices in the FSA. But we have accepted and addressed the authority’s remarks," he says.

Information task

According to Søren Kolbye Sørensen, there is also a great task in explaining to the members that they have to retire later or accept a lower pension – a task they have already begun addressing.

"We will inform our members about this, so the individual member can make the right choice. For some it might make sense to retire later, while others will want the pension here and now, even if it has to be distributed over a longer period of time. We try to make that choice as clear as possible for each member."

Will it not be difficult to go out and explain to the members that they have to lower their expectations, when they had other ideas?

"Of course it will. It's a challenge we share with the whole industry. We have been informing people about the issue for a number of years in our annual reports, at general assemblies, and in newsletters, and we will step it up in the coming time," he says and adds:

"The most important thing for us is that our members can feel safe knowing that we do things properly and that they can make their choice on an informed basis."

Greater freedom of choice

Aside from bringing parts of the investment management activities back in the house, Søren Kolbye Sørensen will also look at how to solve the challenges arising in the pension system, as a growing number of people become self-employed.

Moreover, its members must be given greater freedom of choice when it comes to picking a pension plan.

"That freedom of choice allows members to better adjust their plan to their life situation. But there will never be unconditional freedom to choose. That would propel our costs to a disproportionate level, and that’s not in the interest of our members. Their interest is a plan with broad coverage that gives them a high pension with the opportunity to opt-in on the most relevant areas where we see the greatest interest," says Søren Kolbye Sørensen.

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