SVP Jan Ritter, Head of Hedging & Treasury

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1 SVP Jan Ritter, Head of Hedging & Treasury

2 ATP s two business areas Pension and investment Europe s third largest pension provider Net assets of EUR 101bn 5 million members Administration Largest administrator in the Nordic countries Disburses two-thirds of Danish welfare benefits LG, holiday allowance, state pension etc. 1

3 Facts about ATP ATP is an independent institution established by statute managed by the social partners for all Danes 1964 established 101 billion euro 2,800 employees 5 million members 2

4 Agenda ATP s business model Construction of liabilities and discounting curve Evolution in Hedging Challenges 3

5 ATP business model at a glance 4

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7 Investment Hedging Contribution Factor portfolio Purchase Protection Portfolio Reserves Hedge portfolio -Bonds -IR derivatives Guarantees Internal funding Surplus liquidity 6

8 Mark-to-market a driving factor for ATP s development Traffic light regulation Pension liability hedging Market values of liabilities Dynamic Risk Budget Separating hedging and return seeking activities Alpha-Beta separation New pension product 80/20 Balanced investment portfolio Diversified the Hedge Portfolio further Ready for Solvency II Change in discount curve Developed own model for longevity. Made provision of DKK 18bn Change in accrual model rolling annuity Risk factor approach in investment portfolio 7

9 Contributions / future pensions The guaranteed product All contributions to the guaranteed product are converted into promised pensions (life long annuity) Contributions are guaranteed life long at an annual accrual based on i. Discount curve DKK ii. iii. Age and life expectancy Retirement age Age Over a lifetime this will generate high and stable returns High yearly interest accrual DKK 21 years Future pensions Bonus 47% Life-long annuity where members are expected to live, on average, another 20 years after retirement App. 6% after tax and costs Contributions Normal 53% 8

10 All members guaranteed cash flows Well defined cash flow and members have no possibility to leave ATP ATP use principle of market valuation on both the asset and the liability side The discounting curve has to reflect the characteristics of the liabilities with respect to currency and maturity It has to be replicable i.e. ATP has to be able to hedge the interest rate risk inherent in the liabilities It has to be robust in most economic scenarios, but it will not necessarily be optimal in one given economic outcome 9

11 Development in ATP s discount curve % DKK IRS(6m) % DKK IRS(6m) 40% EUR IRS(6m) 15% Danish Gov Bonds 35% German Gov Bonds End of % DKK IRS(6m) 15% EUR IRS(6m) 20% EUR IRS(1d) 25% Danish Gov Bonds 25% German Gov Bonds Market curves today ATP s discount curve 15% 15% 20% 25% 25% 10

12 Longevity ATP uses own developed life expectancy model SAINT Model developed in 2007 and used for accrual since Since 2011 SAINT is used to create expected cashflow for guaranteed benefits Is updated every year Additional provisions due to increase in life expectancy: Accumulated provisions since 2000 to cover increase in life expectancy (left axis) Life expectancy for 65 year old (right axis) bn DKK Year

13 Hedging of pension guarantees Hedging of pension guarantees The hedge portfolio has effectively protected ATP s reserves and thus the ability to live up to the guarantees Rational/reasons: Produce sufficient return to deliver on guarantees independent of level of interest rates Discount curve Implementation: Full hedging of interest rate risk in a separate hedging portfolio Hedge portfolio P&L Liabilities 12

14 Development in the swap portfolio Trading size on 30Y EUR IRS 500 mm mm mm IRS risk and counterparties Notional: EUR 50+bn Risk: EUR 70mm DV01 13

15 Hedging challenges today and in the future Liquidity Hedging with the most liquid products in Europe ATP is still able to hedge all new liabilities 100% Challenges: Bond Huge ATP ownership Market impacted by QE asymmetric liquidity Ok issuer market but less capacity in the secondary market (FRTB will have an impact soon) Fear a run for high quality bonds for collateral purposes Swap Different pricing between OTC and cleared Increasing demand for margin IM bonds no issue for ATP VM cash no issue in normal markets! Costs much higher Demand for timely and fast settlement of Variation and Initial Margin 14