The ATP Group Annual Report 2012

Management's Review Business Model Risk Pension Hedging and investment Hedging Investment Administration Social Responsibility The ATP Group Financial StatementsHedging and investment-activity results andperformance targetHedging and investment-activity results totalled DKK 11.5bn, achieved on the basis of a return ofDKK 57.4bn. Market return significantly outperformed the industry averageHedging and investment-activity results in 2012 relative to theperformance targetReturn on the hedging and investment portfoliosDKK billion20181614121086420Hedging-activityresultsInvestment-activityresultsPerformance target,premiumPerformance target,inflationReturn2012Hedging portfolio 45,415Investment portfolio 11,998DKK million per cent 1Total 57,413 9.91) The return is calculated on a money-weighted return basis,using daily values.ATP's portfolio is divided into a hedging portfolio and aninvestment portfolio to match ATP's two-pronged objectiveof preserving the long-term purchasing power of pensionswithout exposing members to unnecessary risks:• The hedging portfolio, the aim of which is to ensure optimalhedging of the interest-rate risk of ATP's pensionliabilitiesFor 2012 in isolation, the Supervisory Board set the targetthat hedging and investment-activity results were to equalthe actual rate of inflation with a premium of 1 per cent. Theperformance requirement was calculated at DKK 17.2bn –the actual rate of inflation resulted in a performance requirementof DKK 12.1bn, while the premium corresponded toDKK 5.0bn. This is very ambitious in a year of interest ratesat historic lows and uncertain financial markets.• The investment portfolio, the aim of which is to generatean absolute return that is sufficient to preserve thelong-term purchasing power of pensions.Overall hedging and investment-activity results were DKK11.5bn in 2012. Results are comprised of an overall return onthe hedging and investment portfolio of DKK 57.4bn, or 9.9per cent, resulting in tax on pension-savings returns of DKK8.7bn. Conversely, the changes in guaranteed benefits affectedhedging activities by DKK 37.0bn, attributable mainlyto the decline in interest rates during the year. Finally, expensestotalling DKK 0.2bn were incurred.The ATP Supervisory Board has set the long-term targetthat, over time, hedging and investment-activity resultsmust be sufficient to ensure that pensions are revalued inline with the Retail Price Index (RPI). The target is thus independentof financial market conditions.Overall results of DKK 11.5bn are assessed as satisfactoryin the context of the challenging market conditions withlow interest rates and the low risk level maintained in ATP'sportfolio throughout the year. Moreover, expenses related tohedging to protect against heavy losses that did not occuralso detracted from the return.Return of DKK 57.4bn on the hedging and investmentportfolioIn 2012, hedging activities generated a profit of DKK 1.5bn,while investment activities achieved a profit of DKK 10.1bn.Hedging-activity results are comprised of a large positivereturn, which is offset by an almost similar increase in thevalue of guaranteed benefits. The return on hedging, comprisedprimarily of long-dated government bonds and interest-rateswaps, totalled DKK 45.4bn.The ATP Group – Annual Report 201235