Benefitting pension contributors: An analysis of the Danish pension fund sector

Lise Falk Davidsen & Line Vestergaard Petersen

Student thesis: Master thesis


The purpose of this thesis is to investigate, whether it is possible to enhance the performance of the Danish pension fund sector. It will be investigated whether the pension contributors could achieve a lager benefit if the pension funds’ investment strategy was changed. Offering the defined benefit products, the Danish pension fund sector is responsible of carrying out the investments of retirement savings and holds the risk by setting a guaranteed return. To ensure a proper conduct with regards to portfolio management in the pension contributors’ interest, legislation, both Danish and European, highly restrict the investment strategy. The dayto- day solvency requirement and the risk-based focus on investments themselves force the pension funds to act rather short term in their investments. According to theory equity outperforms risk-free assets over time. Further, volatility decreases with time since annual returns on assets are mean-reverting. This combined with the fact, that the Danish pension funds are long term investors facing an infinite investment horizon supports that holding risky assets on a long term basis increases probability in achieving higher returns, benefitting the pension contributors to a higher extent. From a comparison of the derived theoretical optimal portfolios and the estimated actual portfolio of the Danish pension fund sector, it is concluded possible to achieve a higher performance. The day-to-day solvency requirement and the risk focus on investments are not implemented in the theoretical optimised portfolios, and these legal requirements are assessed part of the divergent performances of the compared portfolios. The time perspective shows important both with respect to setting the investment strategy and executing it. A relaxation of the solvency requirement enables the Danish pension fund sector to incorporate a long term focus in its investments, enlarge equity ratio in the portfolio and thereby opening up for achieving higher returns. Pension funds should include both the short term and long term perspective in the investment strategy. Executing the investments should be aligned with the revised strategy, why it is important that incentive based targets and remuneration packages are changed to reflect both the short term and long term focus in the investment strategy.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2011
Number of pages135