Investment firm leads the charge in enlightened capitalism

Investment firm leads the charge in enlightened capitalism

Torben Möger Pedersen, CEO, PensionDanmark, outlines the company’s efforts to support its members beyond providing a stable retirement and necessary steps the world needs to take to advance the sustainability agenda and improve our environment.


Why has Denmark’s pension strategy been so successful?

PensionDanmark was established in the early 1990s as part of—at the time—a quite progressive pension reform that set up mandatory, savings-based pension funds for all blue-collar workers. Previously citizens had only the public pension fund to rely on for retirement. During the following 30 years, we built up supplementary agencies under the Pillar 2 structure, an addition to the public pension plan. Essentially everyone employed in the Danish market is covered by pension plans, wherein each month they pay a contribution of somewhere between 12 and 18 percent of their individual wage. When they retire, more than half of their income as retirees comes from these savings accounts as a supplement to their public pension. Contributions are tax deductible and benefits paid out are taxable.

This pension system design has made the Danish public finance structure the most sustainable in Europe despite the demographic challenges from an increasing population of elderly people. All benefits are self-financed because they are paying taxes on their pension income. Their taxes contribute to funding healthcare and other programs, which has led to a very stable public finance system. We have no poverty issues among pensioners, which is a large problem in other European countries. In Denmark, everyone who retires can maintain a well-deserved, high-quality standard of living. The large amount of accumulated savings in the pension funds can be used to finance important societal objectives, such as long-term investments in renewable and green infrastructure.


What is PensionDanmark doing to promote sustainability and support the country’s citizens?

Like other long-term investors, we are challenged by low interest rates of foreign and mortgage bonds. Throughout the past decade, we have changed our asset allocation, moving away from bonds into non-listed assets such as real estate, renewable energy assets such as onshore and offshore wind and solar farms and—in several instances—direct lending to companies. While traditional pension funds are focused on listed assets, we now have more than a third of our assets in non-listed areas. We are one of the biggest real estate investors in Denmark and engage in many construction projects to build housing offices and public healthcare services buildings for elderly care, for example. We recently completed construction of 800 high-quality and affordable student housing facilities at a local university. We build these projects effectively and generate a return for members of our pension scheme. We are developing a similar model for elderly care services with local businesses by using our capabilities as a real estate investor to build centers that are regarded as attractive by local communities. We also do the same thing with renewable energy infrastructure. Our members are proud owners of almost 4 GW of green power production capacity, which is a little more than the annual power consumption of our 750,000 members. We not only provide value through our pension schemes but through green power. This is a practical and down-to-earth way of creating positive impact.

Additionally, we put a lot of effort towards industries that have high carbon dioxide emissions such as cement, shipping and transport. Innovative technology can help move these industries in the right direction. For example, we are a big investor in Danish shipping company A.P. Møller-Mærsk that has a fleet of more than 700 vessels. They have announced that all their vessels will run on fossil-free fuels in the next couple of decades. We support this move not only as direct investors in the company, but also towards facilities that provide them with the required green fuels. Producing clean power for the grid and hydrogen from wind and solar assets is one of the most interesting technologies-driven projects of the next decade. Power-to-x technology uses green power to produce green hydrogen through a chemical process using electrolyzers. This can be used as clean fuel for heavy transport such as trucks, ships and airplanes. Green hydrogen can also be used to produce green ammonia, which can be used as fertilizer in the agricultural sector. We are aiming for a green energy industry that not only uses green power to substitute power produced by coal and hydrocarbons, but also as a new type of sustainable resource for industries such as shipping, transport and agriculture that find it challenging to lower carbon emissions.


What kind of partnerships has PensionDanmark made to further its sustainability agenda?

It is a small world in which we live, and we must work together. In September 2019, we were one of the 12 founders of the Net-Zero Asset Owner Alliance announced during the United Nation’s Regional Climate Weeks in New York. A group of large asset owners, investors and pension funds agreed to form an alliance with 2050 as the final mark to transform our portfolios to having a net-zero carbon dioxide impact. The alliance now has more than 60 members. We combine our financial muscles and use our position as large shareholders in global companies to assist in their transformation. In 2012, PensionDanmark helped found a specialized investment fund company called Copenhagen Infrastructure Partners. We were the first and sole investor and we are now joined by more than 100 participating investors. Copenhagen Infrastructure Partners has become the world’s largest investment fund company in the area of renewable energy infrastructure. We are now investing in Europe, North America, Korea, Taiwan, Australia, Vietnam and Brazil. We are using Nordic experiences to develop, construct and run offshore wind farms. We recently set a target to have more than €100 billion in fund structures by 2030, which will generate a significant number of activities.

Another example is our partnership with other Danish partners on the development of a first-of-its-kind energy island. The asset will be in the North Sea and provide facilities for offshore wind farms to transport power to the shore efficiently. The development will also act as a hub for other types of clean energy such as green hydrogen and carbon capture and storage. In the next decade, we will see 10 or 15 of these islands in the North Sea alone and maybe 20 in Southeast Asia. The use of offshore wind has been limited until now by the depth of the water, with offshore wind farms requiring water depths no more than 40 meters. Floating platforms have been developed to place offshore wind farms in deep-water areas such as off the coast of California or Japan. In the next decade we will see a massive rise in the construction of new types of offshore wind projects, which will become an important part of our green ecosystem. By sharing our experiences, we can invite others to join our journey and mobilize large pools of capital.


What impact has the 2021 United Nations Climate Change Conference had on our move towards having net-zero carbon emissions across the globe?

It is very positive that the Glasgow agreement is supported by so many countries, including big carbon dioxide emitters like China, India, Brazil, the U.S. and Europe. We perhaps would have liked a more ambitious agreement, but we are happy to have reached a consensus. It is important to highlight that the reduction of the use of coal was mentioned for the first time at the annual event. Many countries still rely heavily on coal as a part of their energy supply chain. India and China accepting to address this is important. The Glasgow agreement will encourage long-term investors like PensionDanmark and our colleagues in the global pension fund industry to increase allocation of investments in the green transition. Green investing should be looked upon in a more holistic way. It is not only a question about investing in wind farms. We must assist companies where we are a shareholder to change their business models to be more environmentally friendly. The outcome of the Glasgow meeting will encourage us and our colleagues to step up our efforts in this area.


What specific areas of focus will be crucial in bringing about a speedy energy transition?

It is important to develop global standards for measuring and reporting on carbon dioxide emissions. Data is of immense help for investors and companies in configuring their business models and aids in forming a guideline for banks in lending procedures. We support the work currently being done by the European Union on taxonomy and green reporting. In 2023 or 2024, we will have common standards on how companies report these issues. A focus on establishing global standards for carbon dioxide and other sustainability issues such as biodiversity will aid investors and customers and put pressure on companies to move in the right direction.


What further gains do companies obtain in focusing on sustainability beyond helping the environment?

All companies should be aware of challenges and opportunities presented in the sustainability agenda if they are to have a prosperous future. Recruiting the most talented young workers requires a real answer to the first question they ask, which is what the company is doing to make the world a better place. If companies cannot come up with a satisfactory answer, they will not be able to attract the best talent. Customers ask the same question, which influences shareholders. There is now weight to move companies in a sustainable direction. We are currently seeing a move in the global business community away from the old capitalist shareholder model to a more holistic framework. Business leaders must accept that they have an impact on society, nature and the environment and take this into account in their decisions. To some extent, the Scandinavian model of capitalism is being endorsed in many countries. The shift towards an all-inclusive stakeholder sentiment in capitalism is promising.

What impact has the COVID-19 pandemic had on the company’s operations and industry as a whole?

The pandemic period has been extremely positive for us economically speaking, which none of us could have predicted. PensionDanmark managed to get through the crisis quite well due to a strong reaction from policymakers that ensured the world economy did not nosedive. Growth picked up during the summer of 2020 and has continued to do so supported by these fiscal policies and low interest rates from banks. The fact that we were able to produce vaccines so quickly also had a hugely positive impact.

The COVID-19 crisis has caused us to work in new ways. In March 2020, we had to close our offices and send employees home equipped with computers and iPhones. In two hours, we were up and running as if we were at the office, supported by our strong digital structure. From a customer’s point of view, it was as if nothing had happened. Video call meetings are now commonplace whereas two years ago we would have flown to meet up with each other in person. This will be a mainstay trend even after the pandemic. In our organization, the idea of sending two investment people to London for a day trip will no longer happen, for example. Many of our employees prefer a blended telecommuting experience that combines a few days at the office to interact with colleagues and other days at home on their own.

Denmark had an elevated level of digitalization before the crisis began. All Danes have access to the internet and almost all families have a number of smartphones. The technical infrastructure in Denmark was already prepared to meet this next step. PensionDanmark is a fitting example. In the last two and a half years, we introduced robotics technology so more than 100 processes previously handled by human resources have been fully automated. Customers can apply for a pension online, and a bot takes care of it. We use artificial intelligence to manage our web chats and answer about two-thirds of our emails. The use of digital technologies has been massively boosted by the COVID-19 crisis.


What specific initiatives has PensionDanmark created that you as co-founder are most proud of?

We have a healthcare program focused on preventive treatments, which has now become the largest private healthcare program in Denmark. Every year we do more than 500,000 physical therapy and chiropractic treatments in almost 1,000 clinics all over the country. We introduced an app called Online Psychologist in 2021, which is an online psychology service with no waiting times. With just a click, you can access a psychologist and have online conversations, which has become extremely popular among our members. It is a convenient way to get access to relevant medical services. This is a supplement to our Online Doctor service that was introduced to members last year. We also have a program where we co-finance lifelong learning programs for the members of our pension fund. We want to take care of not only their health but their skills. These days it is important that people have relevant education as adults to be part of an effective labor force. Good health and good skills entail a longer position in the labor market and a relatively larger pool of savings and pension paybacks. We follow a holistic perspective in servicing our members. We are no longer just a pension fund; we are a welfare services provider. Our next step is to provide a line of retiree services.

I was the first employee in PensionDanmark and the co-founder. When we started, we were tiny and have since grown to a substantial size. It has been an amazing journey to be a part of. Our most significant contribution has been that ordinary blue-collar workers in Denmark can now look forward to a retirement with financial security. The change of the Danish labor market pension system has been the largest welfare reform in Denmark since the Second World War. We now have a structure that is very much trusted; people are confident in what we are doing.