The ATP Group Annual Report 2012

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Management's Review Business Model Risk Pension Hedging and investment Hedging Investment Administration Social Responsibility The ATP Group Financial StatementsRisk and risk managementPrepared for very negative events and at the forefront of Solvency IIExcess cover relative to the individual reserve requirement andthe red-light scenario of the Danish FSADKK billion706050403020100Q1 Q2 Q3 Q4Excess cover relative to theDanish FSA's red-light scenarioExcess cover relative to theindividual reserve requirementIndividual reserve requirementReserve requirement under theDanish FSA's red-light scenarioOVERALL RISK MANAGEMENTATP's overall risk management focuses on five main areas:longevity risks, market and credit risks, counterparty risks,operational risks and regulatory risks.Longevity risks concern only pension activities, market andcredit risks and counterparty risks concern both investmentand hedging activities, while other risks concern all segmentsof the ATP Group.The most significant risks facing the ATP Group relate to theATP scheme, which guarantees members fixed lifelong pensions.In this context, life-expectancy developments pose aparticular risk to ATP.The ATP Supervisory Board attaches importance to ensuringthat the bonus potential – i.e. the value of investmentassets over and above the value of guaranteed benefits –is robust even in extreme situations so that ATP's financialflexibility remains intact. Given that the ATP Group investsmembers' contributions in the financial markets and markspension liabilities to market based on a yield curve, the investmentrisks facing the Group – including market, creditand counterparty risks – are obvious and quite substantial.A number of other risks – for instance operational and regulatoryrisks – are typically less quantifiable. However, ATPstill includes these risks in its risk assessment. The relativeweighting of the various risk factors is lodged with the SupervisoryBoard.ATP's overall risk management is based on an individual reserverequirement and a dynamic rule, respectively. In addition,the Supervisory Board has defined policies and frameworksfor management of individual risk types.Solvency II and individual reserve requirementAlthough not subject to the upcoming Solvency II regulation,ATP has decided to comply with its requirements asthey further strengthen its risk management in relevantareas. Moreover, compliance ensures that ATP is at theforefront of regulatory developments in the industry. ATPthus calculates an individual reserve requirement that iscompatible with the risk measurement under the upcomingSolvency II regulation.The individual reserve requirement stipulates that the bonuspotential must be sufficient to ensure that the risk oflosing the bonus potential within a 12-month horizon isless than 0.5 per cent.This means that ATP cannot invest freely if the value of itsassets approaches the value of the benefits guaranteed tomembers. If these values approach each other, the risk isreduced to ensure that sudden losses do not weaken theassets to such an extent that ATP will not be able to pay theguaranteed benefits.The ATP Group – Annual Report 201220
Management's Review Business Model Risk Pension Hedging and investment Hedging Investment Administration Social Responsibility The ATP Group Financial StatementsOverview of the most significant risks and how to manage theseMost significant risksLongevity risks– guaranteed lifelong pensionsMarket and credit risks– financial-market investment– impact of interest-rate developments on pension liabilitiesCounterparty risks– ability to meet payments for unlisted financial contractsOperational risks– technology use for bulk disbursementsRisk managementUse of life-expectancy model that factors in expected future changes inlife expectancy.Management of the overall investment risk through daily monitoring anddynamic adjustment.Hedging of the interest-rate risk of pension liabilities.Standardised contracts with financial counterparties with high creditratings. Daily provision of collateral with restrictions on the bonds acceptedby ATP as collateral.Procedures and routines, separation of functions and structured methodsfor IT development and testing. Detailed delivery plan and externalreview at the implementation of Udbetaling Danmark.ATP has been reporting the individual reserve requirementto the Danish Financial Authority (FSA) in parallel with itstraffic-light reporting since early 2011. Throughout 2012,ATP has had substantial excess cover relative to both theindividual reserve requirement and the red-light scenario ofthe Danish FSA.The dynamic rule defines a risk budget, determined on thebasis of the bonus potential. If the bonus potential has beensignificantly above the risk budget for a period of time, thedynamic rule slowly increases the risk budget; if, on theother hand, the bonus potential is smaller than the riskbudget, the dynamic rule reduces the risk budget.ATP relies on its own custom model for the calculation ofATP's reserve requirements. This model is also used in dailyrisk management.Accordingly, high investment returns mean that it is possibleto further increase the risk – e.g. by purchasing equities– while major losses result in active divestment.The model was further developed in 2012 and reported tothe Danish FSA as Internal Model for Solvency II in December2012. The aim was to use the model, under the name ofInternal Model, for ATP's reporting of its individual reserverequirement to the Danish FSA starting in 2013.MANAGEMENT OF THE MOST SIGNIFICANT RISKSThe most significant risks facing ATP and an outline of whatis being done to address these risks are specified in the tableabove.Dynamic ruleInternally, the individual reserve requirement is supplementedby the dynamic rule to ensure that the risk never exceedsan upper limit set by the Supervisory Board.Longevity risksATP guarantees its members lifelong pensions. Accordingly,increasing life expectancy (longevity risk) is the greatestpension risk facing ATP. ATP uses the SAINT life-expectan-The ATP Group – Annual Report 201221
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The ATP Group Annual Report 2012

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