A Study of the Danish Pension Sector's Valuation of Alternative Investments: A Research of Valuation Methods, Regulation & Reporting

David Krogh Christensen & Justin Alexander Berger

Student thesis: Master thesis


The pension sector has come under recent scrutiny in light of increased investment in alternative assets. The main concern relatesto the current practices of valuation, considering the inherent issues when working with unnoted assets. Using the theoretical intersection of the MSc in Business Administration & Auditing and the MSc in Economics & Business Administration (Accounting, Strategy & Control), this thesis seeks to answer how the Danish pension sector handles the process of valuation concerning alternative investments and how the sector and regulatory authorities mitigate some of the issues identified during recent increasing scrutiny. The thesis seeks to do so through outlining, analyzing, and discussing related subquestions. The outline describes the pension sector, focusing on significant actors; the pension funds, Insurance & Pension Denmark, and the Danish Financial Supervisory Authority. In addition, the outline depicts the concept of alternative investments, ultimately working with four asset classes;real estate, loans to companies, infrastructure, and private equity. The depiction includes explaining the valuation methods used for each asset class and the legislative and regulatory framework surrounding pension funds and alternative investments. The information and knowledge gathered in the outline work as the foundation for analyzing the sector and alternative investments. An analysis of neighboring countries highlights initiatives already present in similar nations to alleviate some of the experienced valuation issues. The increasing use of alternative investments points to a need for potential solutions, further supported by recent investigations from the DFSA, pinpointing multiple weaknesses in valuation processes, methods and monitoring ongoing changes in values. The analysis contains a deep dive into the valuation of VindØ, a massive infrastructure project with plans of an artificial island and accompanying wind turbines. The case works to illustrate the difficulties of implementing and performing a valuation of alternative investments, using tangible examples of how greatly estimations can diverge. Building on the analysis, a discussion of possible solutions arises. By compiling the findings of the VindØ project and the gained perspectives, the thesis highlights the following six approaches; status quo, limitation on investment, benchmarks, co-valuations, managed investments, and ban on alternatives. The approaches vary in degree of severity, with the status quo needing the least amount of work, benchmarks being of moderate scope, and a ban on alternatives being the most restrictive. Based on a discussion of feasibility, resources needed, and effect, two options emerge as recommendable; benchmarks and managed investments. Through further scrutinization, managed investments show inherent weaknesses in implementation and the associated costs. In conclusion, the thesis recommends implementing, or at the very least, investigating the possibility of using benchmarks for ongoing valuation of alternative investments. This method allows both pension funds and the Danish Financial Supervisory Authority to monitor value changes and investigate deviations. Gathering and publishing benchmarking could rely on either the industry, an independent public council, or the DFSA using private index providers. Using this method could potentially help to limit some of the issues identified throughout the thesis to the benefit of the sector, authorities, and ultimately pension customers.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2021
Number of pages110