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

ICMA CONFERENCE NORDIC BUYSIDE PERSPECTIVE Transparency, liquidity and regulatory impact

Sampension  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) 2

Products and investments SAMPENSION Investments are managed to deliver Traditional stipulated nominal guarantees with a very DB product high degree of certainty. Non- Non- Conventional lifecycle approach of Reinsurance of municipal obligations to guaranteed guaranteed scaling down the risk as policyholders civil servants. DB-scheme indexed to lifecycle DB grow older wage-inflation product reinsurance Unit-linked product that offers Link members to invest part of their savings pension on an individual basis 3

Stating the obvious SAMPENSION  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 one 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

Stating the obvious – cont. SAMPENSION  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

”Transparency” is next SAMPENSION  Transparency is a double-edged sword Market share Big Small Big Ticket Small size  Probably supposed to protect small investors, which are exactly the ones 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

A new trading environment SAMPENSION  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

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

Increase in Risk Premiums SAMPENSION  Compensation for reduction in liquidity  Expected return (r 1 ) = 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 (r 2 ) = r 1 + f(volatility)  Regulatory risk premiums  Expected return (r 3 ) = r 2 + 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

Value based investing should do well SAMPENSION  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

The trading platform of tomorrow SAMPENSION  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 – otherwise it will not fly anywhere  Higher skills and more guts required on the buy-side – can we deliver?  Vulnerable to ”Flash Boys” 11

A few random thoughts at the end SAMPENSION  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

Thank you for your time and attention Kasper Ullegård Head of Fixed Income KUL@sampension.dk Sampension Tuborg Havnevej 14 2900 Hellerup sampension.dk 13