and regulatory impact Sampension Established 1945 as Kommunernes - - PowerPoint PPT Presentation

ICMA CONFERENCE NORDIC BUYSIDE PERSPECTIVE

Transparency, liquidity and regulatory impact

2

• Established 1945 as Kommunernes

Pensionsforsikring

• Manages industry-wide pension schemes,

primarily white collar workers in municipalities and central government

• Organised as a life insurance limited

company, but essentially non-profit

• 300.000 policyholders
• Balance sheet of 257 bn. DKK or approx.

35 bn. EUR

• Solvency coverage 290 % (DB scheme)

Sampension

SAMPENSION

Products and investments

3

Traditional DB product Investments are managed to deliver stipulated nominal guarantees with a very high degree of certainty. Non- guaranteed lifecycle product Conventional lifecycle approach of scaling down the risk as policyholders grow older Non- guaranteed DB reinsurance Link pension Unit-linked product that offers members to invest part of their savings

• n an individual basis

Reinsurance of municipal obligations to civil servants. DB-scheme indexed to wage-inflation

SAMPENSION

Stating the obvious

• Regulation has come a long way
• Pretty much every field within the financial markets and the financial

industry has seen significantly increased supervision, reduced room to manoeuvre and a lot of red tape

• An extremely costly path.
• And the pendulum is not about to swing the other way. If anything it only takes
• ne or two ”bad stories” for the momentum to run even further
• Law - and enforcement - is all about form and less about content
• Easier to monitor and to some extend less difficult to comply with (CMA)

4

SAMPENSION

Stating the obvious – cont.

• But unlikely to prevent the next accident from happening
• Economic costs are significant
• Parts of the financial industry has, however, clearly become better

capitalized and less risky

• This has all the well known and widely published side-effects:
• Less bank balance sheet available
• Less leverage and a higher cost of leverage
• Smaller real money risk budgets
• Risk capacity driven by regulatory risk weights (Bank, Insurance, Pension

ect.)

5

SAMPENSION

”Transparency” is next

• Transparency is a double-edged sword
• Probably supposed to protect small investors, which are exactly the
• nes we represent. However, paradoxically investors in a collective

scheme may suffer

• Likely to drain liquidity – at least in the short run
• Another increase in administrative costs
• More tickets
• ”Black Hole” of data
• Less time for portfolio management

6

Big Small Big Small Market share Ticket size

SAMPENSION

A new trading environment

• Pricing still competitive - but for limited size
• Depth has disappeared
• Hedging dominates value in the short run
• Beware of ”Flash Boys”
• ”Gapping” and ”overshooting” is the new norm

7

SAMPENSION

Is this bad and evil for a Danish Life Insurance company?

• NO, and here is why:
• Increase in risk premiums
• General drop in liquidity
• Time-varying liquidity
• Regulatory premiums
• Volatility premium
• Value-based investing should do well
• The trading platform of tomorrow
• Price taker vs price provider
• The possible role of the real money investor

8

SAMPENSION

Increase in Risk Premiums

• Compensation for reduction in liquidity
• Expected return (r1) = r + f(general liquidity) + f(time-varying liquidity)
• Not obvious that this is reflected in today’s market pricing
• Compensation for increase in volatility
• Expected return (r2) = r1 + f(volatility)
• Regulatory risk premiums
• Expected return (r3) = r2 + f(excess/lack of demand due to regulation)
• This should contribute to an increase in expected returns…
• … but has to be compared to the increase in admin costs due to tighter

regulation…

• … and the macroeconomic loss due to the increased allocation to non-

productive resources

• The jury is still out!

9

SAMPENSION

Value based investing should do well

• The traditional arbitragers are fewer and have less firepower
• Markets will overshoot a lot more
• This should in theory lead to a higher frequency of ”extreme

valuations”

• An advantage for long term investors who can stomach initial losses and

volatility

• But clearly easier said than done!

10

SAMPENSION

The trading platform of tomorrow

• There will be no return to pre crisis conditions
• Various suggestions to a ”solution”
• All-to-all platforms
• More electronic trading
• Bigger issues
• Price giver vs price taker: buy-side to deliver liquidity to the market
• The latter is the most important
• A re-allocation of the bid-offer premium to those who act as price givers –
• therwise it will not fly anywhere
• Higher skills and more guts required on the buy-side – can we deliver?
• Vulnerable to ”Flash Boys”

11

SAMPENSION

A few random thoughts at the end

• Regulatory risk premiums (or lack of the same) to take a very

prominent role in the long term investment decisions

• Real money balance sheets as the new warehouse?
• So far not a word about central clearing and bilateral IM requirements

(EMIR-driven)

• Another significant burden in terms of time, costs and focus
• Introduces huge tail risks - but “eliminates middle of the road” risks
• Buy-side CCP access with respect to clearable OTC derivatives seems

inevitable

• Complicated and interesting times ahead…

12

Sampension Tuborg Havnevej 14 2900 Hellerup sampension.dk

Thank you for your time and attention Kasper Ullegård Head of Fixed Income KUL@sampension.dk

13