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Risk management

P+'s main responsibility is to ensure that the pension commitments towards the members can be met both short and long term.

The Board determines P+’s risk management framework while the day-to-day management monitors risks and ensures that the framework is complied with. The market value of the pension commitments and the assets are calculated regularly.

P+ also calculates the requirement to the basic own funds (the individual solvency need) based on the guidelines defined by the Danish Financial Supervisory Authority. The individual solvency need is in brief a statement of the required capital relative to the risks that the pension fund has accepted.

P+ is affected by a number of different risks which impact on the individual solvency need. In relation to calculation of the individual solvency need the Board has analysed the different risks and their possible impact on P+'s solvency.

Market risks consist generally seen of risks related to interest rates, credit, inflation, currency and liquidity. P+ attempts to minimise the total investment risk by diversification.


Risk related to shares
is the risk of losing money if the value of P+’s shares falls. This is P+’s biggest risk in the sense that it is shares that are the riskiest assets. P+’s total share portfolio is well diversified, but if the overall share market drops, the pension fund will lose money. 


Risk related to interest rates
 is the risk of losing money in case of changes in the interest rate level. P+’s secure bonds in the form of government bonds on the asset side normally lose value when the interest rates increase, and the other way around, they increase in value when the interest rates fall. The value of P+’s pension provisions also increase when the interest rates fall and the other way around, it falls when the interest rates increase. But as they are 'outstanding funds', they constitute an opposite effect on the interest rate risk from the asset side. 


Risk related to credit
is the risk of losing money if the market lose confidence in creditor's ability to meet the his debt and consequently requires an increased risk premium. Previously, this risk only applied to emerging markets bonds and corporate bonds, but within the past years also a number of western countries’ government bonds have been included.


Risk related to inflation
 is the risk of losing money on real assets like index-linked bonds, real estate and forest in case of deflation.


Risk related to concentration
 is the risk of losing money due to a large dependence on few assets.


Risk related to currency
 is the risk of losing money when the currency rates fluctuates. In order to reduce the pension fund’s currency exposure, P+ uses forward exchange contracts for the strongest currencies. This is among other things done to comply with the Danish Financial Business Act which stipulates the size of P+’s currency exposures.


Risk related to liquidity
 is the risk of losing money if P+ has to raise liquidity or is not able to meet its commitments. To control P+’s liquidity risk, all investments are marked with a liquidity score which reflects the horizon for liquidating the investment.

Counterparty risk is the risk of losses if one of P+’s counterparties go bankrupt. This includes deposits in bank account as well as unrealised gains on financial contracts like forward exchange contracts.

 

To ensure unrealised gains on financial contracts, P+ requires collaterals from its counterparties, and securities are transferred back and forth on a daily basis. This means that potential losses from a counterparty is limited as for financial contracts.

The insurance-related risks concern the development in mortality, disability etc. Increased longevity means that the pension benefits must be paid for a longer period of time, and consequently this is the most significant insurance-related risk.

 

Operational risks relate to losses as a result of e.g. errors in IT systems or procedures and fraud. P+ reduces the operational risks by having a clear separation of functions and internal controls which are updated regularly. Cooperation with external managers and administrators is also reducing the operational risks.