1. Lars Rohde CEO Global challenges for the pension industry: The financial crisis and ageing British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Tryk Alt+F8 og Afspil auto_open for at vise værktøjslinien til opdatering af automatisk indsat tekst (forfatterinfo og præs.overskrift 2 på masterdias)

2. www.atp.dk2 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Ageing puts pension systems under pressure Percent 60+Millions 60+ Increase (%) 2005205020052050 Germany2537212732 Japan2644344532 Russia1732253542 USA172750108116 China1131144438204 India82085335294 Source: United Nations World Population Prospects: The 2006 Revision

3. www.atp.dk3 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Ageing populations - a global challenge  Every generation must support its children and elderly  Longevity risk and investment risk are largely unavoidable to society as a whole  Different pension systems distribute these risks differently among the government, companies, individuals  Bottom line: Ageing populations put pension systems and societies under pressure - irrespective of how the systems are organised

4. www.atp.dk4 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 The financial crisis has become an economic crisis  The world in recession  IMF’s global growth estimates the lowest since WWII (-0.6 per cent)  Monetary and fiscal policy is being eased  Inflation is falling - but what will happen in the longer term?  Unemployment is rising - fast

5. www.atp.dk5 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 US unemployment is rising - fast Kilde: Bridgewater Associates

6. www.atp.dk6 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Banks and pension funds under severe strain  Government action globally to save banks  Pension fund reserves are nosediving  No. of insolvent pension funds skyrocketing  Danish pension funds have seemed somewhat more robust

7. www.atp.dk7 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 What happened in the run-up to the crisis?  ”Pax Americana” and globalisation -Peace dividend and falling goods prices  ”Greed, governance, and Greenspan”  Deregulation -procyclical regulation -risk based solvency requirements -IFRS

8. www.atp.dk8 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 What went wrong?  Low measured volatility on investments made risk-adjusted returns look attractive  Investors thus accepted higher gearing despite falling risk premia…  … og focussed too little on tail risks and liquidity  Eventually, it turned out that measured risk was far less than actual risk, and everybody wanted out at the same time…

9. www.atp.dk9 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Huge losses on equities in 2008 and 2009 750

10. www.atp.dk10 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 What lies ahead?  Prolonged economic downturn with declining house prices and rising unemployment entails a dangerous dynamic: -Falling private sector demand -Rising desired saving -Renewed pressure on the banks -Need for massive policy stimulus -Global imbalances in focus => implications for exchange-rate stability?

11. www.atp.dk11 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 The dilemma for pension funds  Three major challenges -Ageing -Financial crisis -New regulation  Consequence is huge dilemma: pension funds need higher returns, but they also need to reduce risk

12. www.atp.dk12 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 ATP 2008 ATP Key Figures 2008 Numbers Members4.611.100 Retirees 829.200 Contributors3.089.400 DKK mill. Contributions7.210 Benefits 7.652 Balance677.544 DKK Investment costs/member32 Administrative cost/member40

13. www.atp.dk13 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 ATP’s approach  Highest possible real value of future pensions  Protect ATP’s solvency -Avoid large losses  Hedge uncompensated risiks -Interest rate risk -Foreign exchange rate risk  Diversify aggressively  Have ”Black Swans” and other tail risks in mind

14. www.atp.dk14 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Funding Account Minimize uncompensated risks  ATP hedges pension liabilities in a separate portfolio Investment portefolio Bonus potential Funding Account Swap variable leg Swap fixed leg Pension guarantees InvestmentHedging

15. www.atp.dk15 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Absolute return target The Investment Portfolio consists of a Beta and an Alpha portfolio with separate management and risk budget  Absolute return target -Full alignment with members’ interests -Farewell to benchmarks  β: Long-horizon investment strategies -market risk premia, true diversification, active  α: Short-horizon investment strategies -relative price change

16. www.atp.dk16 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 How much investment risk? Investment portfolio Red light risk OK Red light risk excessive Expected growth in bonus potential Risk of losingbonus potential Minimum risk portfolio

17. www.atp.dk17 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Diversify aggressively  Each of the five risk classes contributes substantially  Portfolio expected to be robust in a broad range of environments  Reduce risk of large losses  Higher risk-adjusted return

18. www.atp.dk18 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 The power of diversification

19. www.atp.dk19 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Funding ratios for different investment strategies

20. www.atp.dk20 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Hedging tail risks – use of options We use option strategies extensively in, e.g., equity and commodity markets

21. www.atp.dk21 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 Investment Return 2008

22. www.atp.dk22 British Chamber of Commerce in Denmark Copenhagen, 20 March 2009 What have we learnt so far?  Possible to retain a pension system with a high degree of security and predictability for the individual - Unit link-products are not the solution  Imperative in the long run to hedge uncompensated risks  Liquidity back in the spotlight  Necessary to focus on investment tail risks -Hundred year storms happen every 2-3 years…  Regulation