RI Interview: PensionDanmark CEO on the fund’s leadership in renewable investing

Many Danish pension funds, including PKA, PFA and the biggest of them all, the DKK640.7bn (€86bn) scheme ATP, are serious investors in renewable technology, especially wind power which is emerging as Denmark’s main power source. But the undisputed leader of the pack is PensionDanmark, a DKK175bn pension scheme for blue-collar workers in the construction and transportation sectors.

PensionDanmark has just short of 10% of its assets in renewable technology and related infrastructure – the highest level of any institution in Denmark and possibly in Europe – and intends to maintain that high level in coming years. This embrace of renewables by PensionDanmark and other Danish schemes has been great news for the Danish government, which needs their investment in order to meet its goal of having renewables account for half of Danish energy production by 2020.

PensionDanmark’s example shows how institutional investors can pave the way to a green economy and, in doing so, make a big contribution to climate protection. How fitting, therefore, that PensionDanmark CEO Torben Möger Pedersen has been asked by the United Nations to talk about the scheme’s renewable investment experience during its “Climate Week” event in New York later next week. Responsible Investor spoke with him before the event.

We recently reported that following the quick success of a DKK7bn renewable energy/infrastructure fund that Copenhagen Infrastructure Partners (CIP) launched for you, CIP is planning a second fund. Is that fund only for you too?
Torben Möger Pedersen: Not this time. We will contribute DKK3.5bn to the second CIP fund and are looking for like-minded investors to contribute other DKK6.5bn in assets for the vehicle.
Why would other Danish schemes be interested?
Danish pension funds face the challenge posed by the low interest rate environment. They’re not getting the yields they need with government or mortgage bonds. Hence, they need to find alternatives that will provide them with higher returns but without the business cycle risk associated with equity investments. In searching for these alternatives, many funds have found that renewable energy and related infrastructure assets are quite attractive in part because of public subsidies and guarantees that reduce the top-line risk. They see a strong investment case for the asset class. Of course another incentive for the Danish schemes is that when they invest in wind farms or green power plants, they make a big contribution to climate-friendly energy production, and in doing so, support the global goals in this area.Have you and CIP recruited other Danish schemes and if so, can you name them?
Yes we have, though we will plan to disclose their names in October. As for us, CIP’s second infrastructure fund will offer these investors low costs and high execution capacity. Consider that CIP’s first fund is almost fully invested, which we weren’t expecting until 2015 at the earliest.
Why aren’t Danish pension funds concerned about Solvency II and its capital charge for renewable investments, which at 49% of their value would seem a big hindrance?
It has to do with the liability structure. A number of European pension funds which I would call “old school” type plans – that is defined benefit (DB) or defined contribution (DC) schemes offering return guarantees – do not have the risk capacity to invest directly in renewable energy on a large scale. Most Danish pension funds, however, are in the process of transforming from DC schemes that offered return guarantees to savings plans which use the life-cycle model and mark-to-market accounting. This substantially reduces their need for solvency capital.
What kind of returns are you expecting from your sizeable renewable investments?
We expect returns to be much higher than those for government bonds but lower than those from private equity. Each renewable project has its own characteristics, including the risk profile, but we can generally target between 6 and 9%.
Are economics the only reason why PensionDanmark is such a big renewable investor?
The primary reason is that we find the investment case very attractive in an environment characterised by low growth, low inflation and low interest rates. That is in keeping with our fiduciary responsibilities. We were the first large pension fund in Denmark to invest directly in renewable energy and related infrastructure. Before then, Danish schemes, including ours, got that exposure through funds. For us, direct investing is the better alternative due to cost and the need for better control over the investments. The fact that the investments contribute to the transition towards a low-carbon economy is an added benefit that is in line with our responsible investment strategy.
What do your beneficiaries think of the strategy?
We have more than 650,000 members who are blue-collar workers in a number of industries, among them construction, transportation and consumer services. Our strategy has been very well received by our members; indeed, it’s what has attracted most of their attention! They like the green dimension to them as well as the additional benefit of creating employment through, say, construction of wind farms, which is a big thing in Denmark right now. We tell our members that a further benefit is that we are now a major supplier of green energy. So when they turn on the light, they can be proud that the green power was enabled by their own pension fund.

Danish pension funds seem ready to help the nation fully switch to a green economy. How fast does the government want this to happen?
You are correct, there is a broad consensus in Denmark that renewable energy is the future. As a result, the government expects that around half of the power production in Denmark will be from renewable sources by 2020. By 2050, it should be 100%. That sounds quite ambitious, but it’s important for investor confidence that you have such a broad-based consensus that that is the way to go. So the chances of achieving the targets are good in my view.
What is your view of Germany’s efforts to build up offshore wind capacity in the North Sea? It seems the undertaking is beset with problems, including cost and timing overruns as well the inability to connect the parks to the mainland…
The undertaking was the right decision for the German government, as it cannot meet its ambitious renewable goals without prioritising offshore wind. There have, of course, been problems, like putting up the turbines in the deep sea or insufficient grid connection investment. But I think that over time these problems will be resolved.PensionDanmark has also made a big contribution in the effort by starting a joint venture with [Dutch grid connection firm] Tennet. The venture, called DolWin, is our first large-scale power transmission investment, and it will provide a connection for several German offshore wind parks.
Given the flurry of renewable activity by your fund recently, has PensionDanmark set an even larger target for renewable exposure?
By the end of this year, we will reach our target of 10% of assets invested in infrastructure and renewable energy. That is nearly four years ahead of schedule. Yet as the value of wind farms depreciate, one has to keep making new and sizeable investments to maintain that level. So our investment program for the next five years requires annual commitments of between DKK2bn and DKK3bn for investments in infrastructure and renewable energy. We will remain pragmatic and evaluate projects on a case-by-case basis. If we find attractive investments, the exposure might be slightly higher than 10%, but if we don’t, it will be slightly lower.