http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/RSS.ashxFSP PagesMon, 11 Aug 2008 13:12:24 +0200http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=1http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=1Finanssektorens Pensionskasse cvr. 49 40 42 12 Årsrapport 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=2http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=2Finanssektorens Pensionskasse 3 TABLE OF CONTENTS Page GENERAL INFORMATION BETTER MEANS AND BETTER LIVES WITH FSP FIVE YEAR SUMMARY HIGHLIGHTS IN 2006 MANAGEMENT AND EMPLOYEES OF THE PENSION FUND CUSTOMER SERVICE ACTUARY INVESTMENTS RISK MANAGEMENT AND COMPLIANCE FINANCIAL STATEMENTS SIGNATURES OF THE EXECUTIVE MANAGEMENT AND THE SUPERVISORY BOARD THE INDEPENDENT AUDITOR´S REPORT ACCOUNTING POLICIES BALANCE SHEET INCOME STATEMENT STATEMENT OF CHANGES IN EQUITY NOTES 4 5 6 8 18 21 27 30 38 45 51 52 54 58 60 61 62 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=3http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=3Finanssektorens Pensionskasse 4 GENERAL INFORMATION Name Finanssektorens Pensionskasse (FSP) Amaliegade 27 DK-1256 Copenhagen K. CBR-no. 49 40 42 12 Home municipality: Copenhagen Supervisory Board Claus E. Petersen, Chairman Michael Budolfsen, Deputy Chairman Birgitte Hagen Børge Hansen Jan Steen Jensen Ane Marie Holm Nielsen Knud Pedersen Pia Lærke Petersen Steen Pommeritz Hans Erik Rasmussen Tina Rønfeldt Executive Management Steen Jørgensen Actuary Claes Vestergaard Auditors Deloitte Statsautoriseret Revisionsaktieselskab Medical advisor Niels Horwitz, chief physician at Bispebjerg Hospital in Copenhagen Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=4http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=4Finanssektorens Pensionskasse 5 BETTER MEANS AND BETTER LIVES WITH FSP 2006 turned out to be yet another good year for FSP Pension and their customers. FSP achieved a good investment return of 7.9 % (gross), and provided a particular competitive rate of interest on policyholders’ savings of 5.5 % (after tax) to the customers. During 2006, FSP Pension gained almost 500 new customers, which means that PFS now counts more than 16,400 customers with pension schemes. In addition, 1,400 customers only have FSP Sundhedssikring (healthcare insurance). The rising number of customers shows that FSP is an attractive choice for companies and employees within the financial sector. During autumn, FSP reached a milestone that clearly shows the advantages of life-long savings in a well-run pension fund: Customer number 2,000 retired and initiated his third age with payments of around 90 % of his exit salary. With total savings of several million Danish kroners, this customer and the approximately 250 other new pensioners in 2006 were able to initiate a financially secure retirement phase. The average savings of FSP’s customers are almost DKK 1.3m. Throughout the years, FSP has offered an attractive rate of return on savings. During the past ten years alone, a deposit of DKK 100 has risen to almost DKK 183 at the end of 2006. The competitive rate of interest on policyholders’ savings is a result of partly the advantages of all assets belonging to the customers, partly the investments because FSP focuses on spreading the risk on many types of assets – bonds, shares, properties, venture funds and other investments in Denmark and abroad. FSP BonusKapital FSP is owned by the customers, and only the customers receive profit. In 2006, FSP emphasised this by introducing ”FSP BonusKapital”, which is a special dividend that can be included in FSP’s capital base and thus makes FSP’s customers direct owners of FSP’s equity (cf. page 28-29). In 2006, this new initiative constituted one percentage point of the rate of interest on policyholders’ savings, which means that each customer directly owns part of the pension fund’s capital base (equity). The BonusKapital is part of the pension fund’s venture capital and is not linked to any form of guarantee. But in return, FSP BonusKapital has the same rate of return as equity. At the same time, the introduction of FSP BonusKapital is an important step away from the guaranteed pension benefits. It provides FSP Pension with more opportunities of investing actively and achieving better returns for the customers in the long run. New services for the customers FSP Pension continuously develops the pension scheme in order to ensure the customers attractive savings for their third age, and at the same time to offer good covers in case of disability or death. FSP has complemented these insurance covers with Dækning ved Kritisk Sygdom (coverage in case of critical sickness) in the form of a tax-exempt lump sum of DKK 140,000 and FSP Gruppeliv (group insurance), which were introduced in 2006. FSP Sundhedssikring (healthcare insurance) offers customers the opportunity of immediate treatment on private hospitals, private clinics and at physiotherapists, chiropractors and psychologists. Companies with health programmes in FSP therefore only need one business partner within the pension industry, and the employees are able to receive a grouped counselling on their pension covers in FSP. Furthermore, FSP Sundhedsforsikring (healthcare insurance) has the advantage that only the interests of companies included in the programme need to be considered, and any profit is exclusively used to reduce premiums. In 2007, we plan to broaden our offers within the health area by adding to the possibilities of strengthening a healthy life and prevent sickness. From 2007, FSP Pension also offers all new customers a modernised pension scheme, in which savings carry interests at market rate without any guarantee, and in which customers are offer2008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=5http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=5Finanssektorens Pensionskasse 6 FIVE YEAR SUMMARY Pension activities 2006 Accounting figures (DKK thousand) Membership contribution at own expense Pension benefits at own expense Investment return Pension operating expenses Profit/loss from reinsurance Technical results Technical results, sickness and accident insurance Results for the year Pension provisions Provisions for unit-linked insurances Equity Assets, total 905,833 523,784 457,746 -501,071 -393,055 -363,174 1.090,366 2,391,505 1,200,849 -31,680 -26,896 -25,180 13,118 11,647 14,584 177,098 807,472 162,817 -1,829 -2,583 -881 415,754 1,084,148 312,994 17,311,299 16,536,856 15,450,325 77,290 50,660 9,167 3,296,257 2,880,528 1,796,402 21,621,700 20,419,339 17,345,887 445,784 -360,717 1,246,717 -25,453 -496 382,025 -78 470,431 14,310,965 6,597 1,482,272 15,900,129 435,081 -332,634 559,929 -25,779 17,860 -317,460 -1,361 -287,736 13,654,994 1,011,841 14,721,084 2005 2004 2003 2002 2006 Return key ratios Return before pension investment returns tax (%) Return after pension investment returns tax (%) Cost and results ratios Rate of cost of premiums (%) Rate of cost of provisions (%) Costs per member (DKK) Expense profits (%) Risk results (%) Consolidation ratios Owners’ equity ratio (%) Cover ratio (%) Solvency ratio (%) Return ratios Return on equity before tax Return on equity after tax Return on insurance provisions before tax 5.6 4.9 2005 2004 2003 2002 13.5 12.0 7.6 6.6 8.5 7.4 3.2 2.9 3.5 0.2 1,985 -0.02 0.00 5.1 0.2 1,729 0.00 0.62 5.5 0.2 1,660 0.00 0.09 5.7 0.2 1,629 -0.01 0.22 5.9 0.2 1,647 -0.02 0.08 19.0 15.6 490 17.4 13.4 437 11.6 7.7 292 10.5 6.1 241 7.5 3.1 172 13.5 12.3 3.7 46.4 44.8 10.5 19.1 17.8 6.2 37.7 37.7 5.6 -26.7 -26.7 4.4 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=6http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=6Finanssektorens Pensionskasse 7 Sickness and accident insurance activities Accounting figures (DKK thousand) 2006 2005 2004 2003 2002 Premiums earned (gross) Value of claims (gross) Insurance operating expenses, total Return on investment after technical interest Results for the year Run-off results Insurance provisions, total Equity Key ratios Claims ratio (gross) Rate of cost (gross) Combined ratio Operating ratio Relative run-off results Return on equity Capital adequacy 9,608 -10,374 -626 135 -1,829 87 3,131 16,000 8,572 -9,651 -576 231 -2,583 -1,602 2,559 16,000 7,572 -8,723 -520 110 -881 260 1,400 8,000 6,751 -6,783 -473 157 -78 -45 1,400 8,000 5,791 -6,208 -506 60 -1,361 290 2,080 8,000 113.9 6.5 120.4 120.4 0.9 -2.9 16.1 126.1 6.7 132.8 132.8 -18.7 -5.4 13.7 115.2 6.9 122.1 122.1 3.4 -2.8 23.0 100.5 7.0 107.5 107.5 -0.7 -0.2 20.7 107.2 8.7 115.9 115.9 5.0 -4.3 19.0 The figures for 2004 are adjusted according to the accounting principles which were changed in 2005. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=7http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=7Finanssektorens Pensionskasse 8 HIGHTLIGHTS IN 2006 Profit of around DKK 415m Again in 2006, FSP Pension achieved satisfactory net results constituting DKK 415.8m. The neat profit – for the fourth year in a row – will benefit the customer of FSP Pension, as it allows for a top rate of interest on policyholders’ savings and for strengthening reserves. Now, equity is at DKK 3.3b, which is the highest level ever. So far capital base has been equal to equity, but from 2006 FSP’s capital base will consist of the total sum of equity and BonusKapital (special dividend). Capital base for 2006 thus aggregates DKK 3,384m. FSP’s equity has a solid margin of safety with regard to the legal requirements on size of equity (solvency margin), which constituted DKK 691m at the end of 2006. Top line growth and customer growth In 2006, FSP achieved a top line growth of around 73 % (gross) in pension contributions paid, which constituted DKK 905,8m (net after labour market contribution). The fact that a number of customers transferred their Employees Capital Pension Fund savings (also referred as LD-savings) to FSP, and the effects of the portfolio transfer of the members from Sparekassernes Afviklingspensionskasse (a Danish pension fund also referred to as SAP) to FSP are considered in these figures. FSP’s balance sheet rose by DKK 1.2b in 2006 – corresponding to 5.9 % - and amounted to approximately DKK 21.6b at the end of 2006 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=8http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=8Finanssektorens Pensionskasse 9 In the course of 2006, FSP gained nearly 500 new customers (net). The top line growth is a result of a targeted effort to strengthen FSP’s profile and make the advantages of being a customer in FSP more explicit. At the same time, the increase in pension contributions reflects the fact that more customers acknowledge the need for larger savings to help maintain their usual lifestyle and to make the savings last longer, because we live longer. A stable and high rate of interest on policyholders’ savings provides security During recent years, FSP has kept to the principle of announcing the annual rate of interest on policyholders’ savings rate at the end of the year, when a stable overview of results and investment returns has been established. In December 2006, FSP’s Supervisory Board set the annual rate of interest on policyholders’ savings at 6.1 % before tax and 5.5 % after tax. As a result, FSP was able to maintain its position at the top of the pension industry with competitive, stable and high return on the customers’ pension savings. The very attractive rate of interest on policyholders’ savings both for 2006 and on a long-term basis emphasises once again the advantages of a pension fund, which only has to provide for customers and member companies. During the past ten years, FSPs rate of return has meant that a deposit of DKK 100 made in 1997 had risen to approximately DKK 183 at the end of 2006. Development in the rate of interest on policyholders’ savings 1997-2006 % p.a. FSP Pension Nordea Pension AP Pension SEB Pension (Codan Pension) PFA Pension Danica Pension Topdanm ark 1997 6.25 6.17 6.00 6.00 6.00 6.00 6.00 1998 8.50 8.50 8.00 8.50 8.20 8.50 7.60 1999 6.00 5.00 4.50 4.50 4.50 4.50 4.50 2000 8.00 6.33 5.25 6.00 4.50 4.50 2001 9.00 9.50 8.50 8.50 8.50 8.50 2002 4.50 5.00 5.00 5.00 4.50 5.00 5.00 2003 4.50 4.50 4.50 4.50 4.50 4.50 4.50 2004 4.50 4.50 4.50 4.50 4.50 4.50 4.50 2005 5.50 4.50 4.50 5.00 * 4.50 4.50 4.80 * 2006 5.50 4.58 5.00 5.00 * 4.50 4.50 5.00* 100 kr. er blevet til 182.71 176.47 176.30 173.50 171.78 170.63 170.51 6.00 10.50 * 4.5 % on old arrangements with guarantee The extent to which the rate of interest on policyholders’ savings is guaranteed varies from one pension fund to another. When comparing rates of interest on policyholders’ savings, it is necessary to be aware of the fact that certain pension funds provide contingent bonus and/or apply a bonus in order to strengthen of the basis of calculation – and thus do not increase the annual pension benefits to the customer. Over a period of years, FSP has thus succeeded in maintaining a stable and high rate of interest on policyholders’ savings rate compared to the pension market, regardless of the fact that there have been good as well as lean years. FSP thus offers the customers security and an opportunity of a long-term preplanning of their pension age. The stability of the rate of interest on savings has been achieved by transferring part of the return to equity in years with large investments returns (for example in 2003-2005), and contrary, amounts have been taken from equity and added to the rate of interest on savings in years with poor investment returns (for example in 2001-2002). Consequently, equity functions as a buffer for return fluctuations. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=9http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=9Finanssektorens Pensionskasse 10 Targeted risk diversification ensured large investment returns in 2006 Fluctuations in investment returns reflect the fact that the pension industry experiences good as well as lean years. The period 2003-2005 was characterised by an almost unbroken upswing on most share markets world-wide, which also came out as an advantage for FSP. At the end of the first half of 2006, for the first time in years the world experienced dramatic declines in share prices. However, these were more than compensated for by the increases in prices in the second half of 2006. A targeted risk diversification on shares, bonds, properties, venture funds, hedge funds, financial contracts on commodities and other assets in Denmark as well as abroad thus ensured FSP a neat (gross) investment return of 7.9 % in 2006. Total income from investment activities was nearly DKK 1.1b. Especially risky investments in shares, financial contracts on commodities and bonds on the new emerging markets as well as properties provided neat returns, while nominal bonds (government and mortgage credit bonds) hardly contributed to the return at all. For these, interest rates were just able to compensate for the loss from the decline prices as a result of the increasing interest-rate level throughout 2006. FSP maintained its hedging against a fall in interest rates, and after recognising the expenses related to this annuity, the return for the year amounted to 5.6 % before tax and 4.9 % after tax (return key ratios 1 and 2). Return 2006 20% 14.8% 10% 16.5% 7.9% 5.6% 1.4% 0% -2.3% -10% Shares Properties Bonds Investment return Hedging Total FSP’s investments in financial contracts on commodities are another example of diversification of the investment risk. When viewed over a number of years, commodity prices and share prices will often go in opposite directions. This is due to the fact that increasing prices on commodities such as metals and energy press down earnings of production facilities. On the other hand, the companies face prospects of increased profit, when commodity prices fall. Expenses viewed in the right perspective During recent years, some debaters within the pension industry have frequently raised the question of the raison d’etre of small and medium-sized pension funds. These debaters think that customers in such pension funds pay large administrative expenses compared to customers in large labour market pension schemes. FSP has hit back at these allegations. When the debaters calculate the key ratio ”costs per customer”, they exclusively consider the factual expenses and thus conclude that costs per customer in FSP and a number of other pension funds are considerably higher than in the large labour market pension schemes as well as in the ATP pension scheme (ATP) and the Employees Capital Pension Fund (LD). Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=10http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=10Finanssektorens Pensionskasse 11 Meanwhile, FSP’s customers hold assets of averagely more than DKK 1.3m, while members of the new labour market pension schemes and ATP and LD still hold assets of averagely less than DKK 100,000. When pension savings in FSP are many times larger, then there also have to be more individual options and offers on personal service and counselling than in the new schemes, which to a far greater degree constitute standard pension coverage. During recent years, FSP has made a number of modernisations and investments in the future in order to meet the majority of the customers’ wishes of individual options and new offers on coverage and security. Therefore, it is our opinion that FSP is the best choice for employees in the financial sector. Furthermore, like other pension funds FSP has had to increase resources in order to comply with the many new statutory measures and requirements which the pension industry has experienced in recent years. Consequently, if focus is turned to the overall picture and expenses are considered in relation to the service level and the size of the pension savings – which means viewing expenses as interest differential, as it is done for instance in pension funds of banks – then it is a fact that FSP Pension administrates at low costs compared to the labour market pension schemes. Advantage as member of a pension fund 5.0% 0.5 % 4.0% 0.5 % 0.2 % 0.7 % 4.5 % 3.8 % 4.8 % 3.0% Typical life insurance company Typical new labour market pension scheme FSP Return to customers Costs as interest differential Payment owners Calculations are made based on a (identical) return on asset of 5 % after tax In relation to the commercial pension funds, the difference is even more evident. In those, the owners naturally demand a rate of return for making money available for the companies. This return on risk normally constitutes approximately 5 % to the owners – in other words, in this area alone a typical customer in FSP Pension ’saves’ DKK 6,500 a year (0.5 % of average savings of DKK 1.3m). In addition, the companies spend considerable expenses on sale and marketing targeted towards new customers. This means that the pension customers totally miss out on around 1.2 percentage point of the annual investment return as illustrated. If the return for the year for instance is 5 %, then only 3.8 % remains for providing return to the customers’ savings. In FSP, expenses merely constitute 0.2 percentage point of the return for the year. Consequently, FSP’s customers have a lead of up until 1 percentage point in return compared to a typical commercial company. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=11http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=11Finanssektorens Pensionskasse 12 FSP is specialised in property projects During the past ten years, FSP has experienced good returns on investments in properties, and as a result these constitute a significant part of FSP’s risk diversification. These properties include attractive apartments and are situated centrally in urban areas or in areas with a nice view of the nature. Moreover, the properties are rented out with preference to FSP’s customers. In 2006, FSP invested in these two property projects: The Arcade in Brønderslev In the middle of the town, Brønderslev, in Northern Jutland, FSP constructed the Arcade with 60 attractive apartments encircling a large atrium yard. Ground floor is occupied by shops – including a super market, an ironmonger and a cafe. The apartments are decorated with bright wooden floors and modern kitchens. In September 2006, the first residents were able to move in. The shops and the 60 apartments were all rented out by the beginning of 2007. Nordlyset in Copenhagen Ø. On Amerika Plads near Søndre Frihavn in Copenhagen, FSP offered in total 53 highly attractive apartments and one commercial tenancy for sale in the spectacular building, Nordlyset. With its large windows it stands out from other buildings in the area. The apartments are brightly decorated with a view of the former store house area in the Free Port of Copenhagen. Moreover, Nordlyset is nominated for the European architecture award – the Mies van der Roheaward – which is granted in May 2007. In 2006, FSP has initiated these two new building projects: Hørsholm North In Hørsholm – close to Oresund – with a golf course as neighbour and close to Kokkedal Castle, FSP is in cooperation with KPC building an interesting two-storey project with 40 atrium houses and 16 apartments. The residential units will be ready for occupancy at the beginning of 2008. First, the atrium houses will be ready and the apartments will follow shortly after. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=12http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=12Finanssektorens Pensionskasse 13 Klosterbakken in Odense On Klosterbakken – one of the most attractive and central locations in Odense – FSP is in cooperation with Arkitekt-Gruppen constructing a building with 60 interesting apartments, all with balconies facing the sun and with a view of the stream that runs through Odense. The building will have lifts and parking spaces for all residential units. The first residents will be able to move in on Klosterbakken in the summer 2008. European investment award for FSP On 1 June 2006, Danish Real Estate Club, which is a joint collaboration between FSP, PKA, SAMPENSION, PFA and Pen-Sam, was awarded one of the four Pan-European awards at Investment & Pensions Europe (IPE) Real Estate's annual awards ceremony in Amsterdam. Danish Real Estate Club won the price for ”Outstanding Industry Contribution” 2006 within the European pension industry. Deputy president in Danish Real Estate Club, Michael Weischer, accepts the IPE price together with Managing Director, Steen Jørgensen, FSP (right), and Finance Manager, Søren Schjødt-Hansen, FSP (left). Danish Real Estate Club was formed in 2004 in recognition of the fact that the pension funds through cooperation are able to not only increase their knowledge on the European property market and save expenses for consultants but also to achieve better returns and greater influence on property investments. This club is the first of its kind in the Danish pension industry, and the members prepare for instance joint analyses of investment opportunities. In this connection, it is particular valuable that the members are able to contribute with different experiences, which together provide better analyses than the pension funds would have been able to prepare on their own. Due to this cooperation, the pension funds have invested a total of around DKK 3b in properties throughout Europe Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=13http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=13Finanssektorens Pensionskasse 14 Generally, extensive interest was paid to this special cooperation at the IPE conference, where FSP’s Finance Manager, Søren Schjødt-Hansen, held a presentation on the cooperation. After the presentation, several foreign participants were interested in the possibility of joining the cooperation. SAP has transferred its portfolio to FSP At the general meeting on 21 April 2006, the approximately 100 members of the pension fund, Sparekassernes Afviklingspensionskasse (SAP), decided to transfer their pension schemes to FSP Pension. More than 92 % of SAP’s members were present at the general meeting, and the proposal was carried unanimously. At the time of the transfer, SAP’s members held assets of approximately DKK 358m in total. FSP’s secretariat administered the scheme for SAP, but due to the increasing statutory requirements of recent years the pension fund was faced with rising expenses for administration as well as less freedom for investing actively. SAP’s members were admitted into FSP’s department B.1, which corresponds to SAP’s pension scheme, but which has a number of options that did not exist in SAP. Moreover, the SAP members engaged in active employment were given the opportunity of transferring to the department, FSP Pension, if they wished to benefit from the more flexible pension benefits that this department offers. The admission of the 100 new SAP members into FSP has no consequences for existing customers in FSP. Quite opposite, the admission means that there are a few more customers to share expenses and that FSP gains greater financial strength. Supplementary savings through FSP Pension Plus In 2005, FSP introduced the opportunity of supplementing pension schemes with further savings. This new offer – FSP Pension Plus – ensures the customers more freedom and a better life as pensioners. Some of the arguments for larger savings are better possibilities of choosing the time of retirement, better possibilities of pampering oneself in the third age and the fact that the life expectancy continues to rise, which means that larger savings are necessary in order to last for 20-25 years as pensioner. At the same time, FSP Pension Plus offers customers the opportunity of consolidating their total pension savings in FSP and receiving a better overview of savings and coverage. For this reason, savings through FSP Pension Plus are registered on the annual statement of accounts and pension. Furthermore, savings in FSP Pension Plus are deposited into a separate account in FSP WebLink, where the customer him/herself chooses how the savings are to be invested. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=14http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=14Finanssektorens Pensionskasse 15 In 2006, FSP had a considerable growth in pension contributions as a result of the transfer of SAP to FSP, the flow of new customers, the transfer of approximately 400 customers’ savings at the Employees Capital Pension Fund (LD) to FSP and the introduction of FSP Pension Plus. The contributions of FSP’s customers during recent years are illustrated in the graphics below. SAP DKK mill. 1.000 900 800 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 435 446 458 524 551 358 Medlemship contribution (gross) Medlembership contribution FSP Gruppeliv (group insurance) provides security to your family In 2006, FSP Gruppeliv was introduced to companies as an extra service offering tax-exempt security to the employees’ families. FSP Gruppeliv is an attractive and competitive group life assurance, which is simple, clear and cheap. The scheme offers the choice between two covers in the case of death. A tax-exempt lump sum of DKK 400,000 and DKK 800,000, respectively. The lump sum is gradually phased out from the age of 51 and terminates at the age of 60. In the case of death, the amount is automatically paid out to the next of kin. An amount of this size makes it easier for the ones left behind to create the financial framework to continue life after the loss of a close relative. The prices (2006/2007) are DKK 500 and DKK 1,000 a year, respectively, when the company pays labour market contributions, and DKK 544 and DKK 1,088, respectively, when FSP pays labour market contributions. The employees are taxed on the contributions as personal income. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=15http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=15Finanssektorens Pensionskasse 16 FSP Gruppeliv can be taken out by a company for all its employees between the age of 18 and 60. The scheme can be taken out without consideration being paid to whether or not the company already has a group life scheme or other life assurances. Consequently, FSP Gruppeliv can both replace and supplement existing schemes. All employees receive the same coverage, and no statement of health is to be submitted, as long as there in compulsory agreements are at least 25 employees. During 2007, individual customers will also be able to take out FSP Gruppeliv. Pension scheme at market rate without guarantee At the general meeting in 2006, the Supervisory Board’s proposal of modernising the pension scheme was approved. As a result, with effect from 1 January 2007 new customers are offered a new and more up-to-date pension scheme, where all savings for annuity pension and capital pension are placed in FSP WebLink at market rate and without guarantee. At the same time, the customers are offered influence on the investment of their pension savings, just as they avoid paying for guarantees. The reason for this is that more and more customers want to have a larger degree of influence on investments – or perhaps they are simply against the feeling of being forced. Consequently, customers are not offered the traditional rate of interest on savings, but instead they receive the annual market return gained from the funds that each individual customer chooses to place his/her pension savings in. This applies whether the return is large or small, positive or negative. As it appears from the figure, experiences from recent years clearly show that customers in FSP WebLink have achieved larger returns on their savings than customers with their savings in guaranteed schemes. Return on FSP traditional savings and FSP Selector - market rate 30% 25% 17.5% 20% 12.8% 15% 8.5% 10% 5% 0% 2003 FSP total return 2004 FSP Selector – Medium Risk 2005 Selector – High Risk 2006 7.6% 11.0% 10.7% 5.6% 13.5% 8.3% 13.4% 28.0% Besides meeting the requests from the customers, a pension scheme without guarantees provides the pension fund and the customers with more freedom to invest more actively and exploit the advantages of investment cooperation. At the same time, requirements to the size of the pension fund’s equity and to strict risk management are considerably smaller in the case of pension schemes at market rate in FSP WebLink than in case of traditional pension schemes at average interest rate and guaranteed benefits. As accounted for in previous annual reports and at the general meeting in 2006, in recent years the development on the financial markets and in Danish legislation have changed the traditional pension guarantees from a sensible safety net into a straitjacket around the pension savings. The guarantees have become a straitjacket, because the Danish Financial Supervisory Authority requires security for the guaranteed pension benefits, even though many of them are not to be paid out to the customers for another 30-40 years. This forces the pension companies to invest more carefully – primarily in bonds providing a modest return with regard to the current low interest-rate level. A pension scheme without guarantees offers more freedom to place savings in the risky shares, which historically have provided better dividends than bonds. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=16http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=16Finanssektorens Pensionskasse 17 FSP’s continuous modernisation of the pension scheme is isolated to the FSP Pension department in order to keep expenses for adjusting IT systems, business procedures etc. at a minimum. When the new IT systems are completely in place, current customers in department A and B will be offered to transfer their accounts in order to give them the benefits of the modernisations of FSP Pension. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=17http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=17Finanssektorens Pensionskasse 18 MANAGEMENT AND EMPLOYEES OF THE PENSION FUND Supervisory Board and Executive Management In 2006, the Supervisory Board held nine board meetings, including the annual Supervisory Seminar in October. This is in line with the recommendations on corporate governance. On 27 April 2006 at the general meeting, the Financial Services Union’s representative, Knud Grøngaard, resigned from the Board. Instead the Financial Services Union was represented by Deputy Chairman, Michael Budolfsen, who at the initial board meeting replaced Børge Hansen as Deputy Chairman of the Supervisory Board. At the general meeting, Board members, Børge Hansen (self-paid) and Pia lærke Petersen (Fionia Bank), were re-elected for the next three years. Trine Hals (Spar Nord Bank) was elected as new alternate for Børge Hansen, and Synnøve Andersen (Fionia bank) was re-elected as alternate for Pia Lærke Petersen. Fra venstre: Hans Erik Rasmussen Børge Hansen Ane Marie Holm Nielsen Knud Pedersen Tina Rønfeldt Claus E. Petersen (Chairman) Steen Pommeritz Jan Steen Jensen Pia Lærke Petersen Michael Budolfsen (Deputy Chairman) Birgitte Hagen The Executive Management of the pension fund consists of Steen Jørgensen, who has been the Managing Director since the year-end 1992/1993. Annual general meeting 2006 On 27 April 2006, FSP held a general meeting at Munkebjerg Hotel in Vejle. 137 people attended the general meeting, and the report as well as the financial statements were adopted unanimously. State-authorised public accountant, Søren Dinesen, Deloitte, was re-elected as auditor for FSP with state-authorised public accountant, Birger Berg Nielsen, Deloitte, as his alternate (Birger Berg Nielsen passed away at the end of 2006). The attendees at the general meeting approved unanimously the Supervisory Board’s ten proposals regarding changes and modernisations of the pension scheme. Some changes offered new opportunities for FSP’s customers, while other changes were a result of necessary adjustments to Danish legislation. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=18http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=18Finanssektorens Pensionskasse 19 Among the new opportunities are better possibilities of transferring accounts, greater flexibility with regard to coverage in the case of death, possibility of pension payment when still employed after turning 60, payment of half disability pension in the case of half disability in order to continue working shorter hours or in a flexible job and the fact that with effect from 1 January 2007 new customers have all their savings for annuity pension and capital pension placed in FSP WebLink at market rate without pension guarantees. Moreover, necessary changes were approved at the general meeting in order to make it possible for members of the pension fund, Sparekassernes Afviklingspensionskasse (SAP), to be admitted into FSP. The attendees at the general meeting 2006 at Munkebjerg Hotel in Vejle. Corporate governance In 2006, the Supervisory Board has continued its work with the Danish Pension Market Council’s recommendations from the report of June 2004 on corporate governance. The Supervisory Board has for instance dealt with the recommendations on the composition of the Supervisory Board, the description of competences, which should be present in the Board as well as continuous, further education of Supervisory Board members and the development initiatives, which would be relevant in connection with corporate governance. FSP’s management team and employees At the end of 2006, FSP had 43 employees (full and part-time) against 42 at the end of 2005. Averagely, there were 38 full-time positions in 2006 against 36 full-time positions in 2005 (measured on the Danish Labour Market Supplementary Pension Scheme contributions). At the end of 2006, the average age was 41. With effect from 1 October 2006, FSP employed Linda Rath-Michaelsen as responsible for a new development department, which is to target its focus on FSP’s business development and the areas of HR, communication and compliance. Linda Rath-Michaelsen came from a position as Deputy President in the OMX Group (Copenhagen Stock Exchange). Linda Rath-Michaelsen has previously been a member of FSP’s Supervisory Board in the period 1997-2001, where she was employed as HR manager in BG Bank. Throughout 2006, an effort has been made to outsource a number of tasks within the area of investment and accounting, which at the beginning of 2007 has been transferred to the investment fund, Nykredit Portefølje Administration, in order to achieve economies of scale and in order to make FSP less person-dependent for a number of very specialised tasks. At the same time, an independent function for risk management was created as a result of the Danish Financial Supervisory Authority’s future requirements in connection with the introduction of Solvency II. This function is together with the responsibility for investments organised within the newly established Financial department. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=19http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=19Finanssektorens Pensionskasse 20 FSP’s organisation after the establishment of the Development and Financial department is illustrated in the chart: Management FSP’s ledergruppe pr. januar 2007: Steen Jørgensen, MD Claes Vestergaard, responsible Actuary Sara Brinks Larsen, Customer Manager (maternity leave) Linda Rath-Michaelsen, Director, R&D Manager Søren Schjødt-Hansen, Finance Manager Helle Haugsted, Secretariat/Property Manager Marianne Omgaard, Accounts Manager IT Secretariat/ Properties Actuary Accounting Customer Service Development Finance Line function Staff function At the beginning of 2007, responsible actuary, Claes Vestergaard, has resigned from his position with effect from the end of the first half of 2007 in order to take up the position as Mathematical Director at one of Denmark’s largest pension companies. In 2006, FSP continued to focus on training its employees. The objective was to strengthen the employees with regard to creating results, working with goals and processes as well as taking initiatives and responsibility. Furthermore, the continued training is to preserve FSP as an attractive work place, which is able to retain and attract skilled and competent employees, who are able to provide the customers with good service. Based on FSP’s mission and vision, the continuous adjustment to the customers’ wishes and needs, the competitive situation of the pension fund and the objective of being an attractive work place, FSP’s values are defined in the following manner: • • • • • • We are responsible We are competent We are emphatic We show initiative We are sensible We are independent Basically, FSP wishes to display the message that FSP Pension is a desirable cooperating partner. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=20http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=20Finanssektorens Pensionskasse 21 CUSTOMER SERVICE Speedy customer service FSP Pension strives for being a good advisor and cooperating partner to the customers. The number of inquiries has grown markedly in recent years. The many inquiries show that the offer to individualise pension schemes is popular and that there exists a real need for the supplementary offers on FSP Sundhedssikring (healthcare insurance), Dækning ved Kritisk sygdom (critical sickness), FSP WebLink, FSP Pension Plus and FSP Gruppeliv (group insurance). In 2006, FSP Customer Service succeeded in keeping service time short for the majority of inquiries. Most inquiries concerned changes of the pension scheme – for instance inserting beneficiaries and adjusting covers – and in such cases customers typically receive an answer within a few working days. FSP also strives for making make service time as short as possible, when it comes to inquiries on speedy access to treatments paid by the healthcare insurance and payments in connection with retirement, disability, critical sickness and in the cases of death. In such cases, FSP is able to help easing the situation and reducing worries a little through speedy service. Customer service time 2006 One day or less 4% 14% 6% Between 1 and 7 days (incl. day 7) Between 7 and 14 days (incl. day 14 More than 14 days 76% In 2006, FSP treated 7,548 cases, and of these 94 % were treated in less than two weeks. The customers’ satisfaction with FSP was emphasised by the latest satisfaction study, in which 90 % stated that they were very satisfied or satisfied with the pension scheme. The study also showed that 80 % have a positive attitude towards choosing FSP, if they were able to decide for themselves, and the majority is satisfied with their options in FSP. FSP is planning a new satisfaction study next year in order to provide the best possible service to the customers also in the future. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=21http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=21Finanssektorens Pensionskasse 22 Many new customers and member companies In 2006, FSP Pension had a net addition of 499 new customers, which meant that at the end of the year FSP had a total of 16,410 customers with pension schemes. Some companies chose to extend their affiliation agreement in order for all employees under the age of 65 to be admitted to the pension scheme without submitting any statement of health. With a traditional agreement, only employees under the age of 35 could be admitted without submitting a statement of health. FSP Sundhedssikring (healthcare insurance) continues to be a very attractive and competitive offer, which is why also in 2006 this scheme attracted new customers. Approximately 4,000 customers are affiliated to FSP Sundhedssikring (healthcare insurance). Customer statistics 1980-2006 incl. Sundhedssikring 20,000 17,798 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 16,410 In 2006, 250 customers chose to retire, which is an increase in the area of 13 %. Thus, in autumn FSP reached pensioner no. 2,000. In 2006 and the beginning of 2007, FSP Pension experienced the largest addition of member companies in several decades. In 2006, FSP had an addition of five member companies, of which two, however, only became part-time customers in connection with a merger with current member companies. At the beginning of 2007, FSP gained further two new member companies. During 2006, FSP visited most member companies. Customer service also contacts all new customers in order for them to, among other things, consider the appointment of a beneficiary and the adjustment of covers to the needs of each individual customer. Savings of the Employees Capital Pension Fund (LD) were not transferred until 2006 In 2005, it became possible to transfer the compulsory savings from the special pension savings (SP) and the Employees Capital Pension Fund (LD) to one’s own pension company. The Danish Labour Market Supplementary Pension Fund (ATP) was fast and arranged already in the middle of 2005 the transfer of savings for approximately 1,600 FSP customers who wanted this transfer. For LD, on the other hand, this transfer dragged out, as they did not until the middle of 2006 - which was a year after savings officially were freed – transfer the savings of the 370 FSP customers. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=22http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=22Finanssektorens Pensionskasse 23 The customers’ savings are placed in separate accounts in FSP WebLink. Both types of savings are included in the annual accounts and pension specification, which as a result provides the customers with a better overview of their total pension savings and covers. Furthermore, FSP receives savings from SP, LD and other pension companies without any fees. This provides the customers with the opportunity of consolidating their pension savings in one place and achieving a better overview. Better customer information FSP strives for developing and modernising the pension scheme in order to keep it up-to-date and in tune with the demands and requests of the majority of the customers. For many years, the pension industry has been criticised for giving poor information. FSP has taken up this challenge and now regularly releases information on pension subjects via the home page, news letters and meetings with customers. In spring 2006, FSP introduced the most recent measure for giving customers simple and precise information on the pension scheme – viz. a newly designed accounts and pension specification. Despite the fact that it has considerably fewer pages than the previous specification, this accounts and pension specification is more informative and easier to understand. This new specification has been well received by FSP’s customers. The accounts specification shows how the customer’s contributions are allocated between savings and insurance covers, and what the customer has received in dividend and paid to administration and security in the form of guarantees. The pension specification shows current covers, including the increase in pension benefits in relation to the dividend for the year. Many people use FSP Sundhedssikring (healthcare insurance) FSP Sundhedssikring has become a very popular scheme, and each year FSP gives customers the opportunity of being treated in private hospitals and clinics. In addition, several hundred customers use the opportunity of being treated by physiotherapists, chiropractors and psychologists. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=23http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=23Finanssektorens Pensionskasse 24 FSP has contact to private hospitals and clinics all over the country and is thus able to offer speedy treatments – some times even the very same day. It was not a single incident, when a woman called FSP one morning and told the employee that she was concerned about a lump in her chest. FSP looked into the possibilities and was able to offer the woman a scan that very same evening (a few hours of driving from her home), which meant that she did not have to wait for several weeks to be examined within the public health care services. Fortunately 95 % of all lumps are benign, but it is a great relief to quickly receive an answer, as the insecurity/period of waiting can be extremely stressful. Since 2003, FSP Sundhedssikring has been part of the agreement, and FSP has succeeded in maintaining a most attractive price, as the scheme merely is supposed to balance expenses and receipts. The extended coverage, which the majority of customers has chosen, costs DDK 1,295 for the period 1 July 2006 to 1 July 2007, while the basic coverage is available for DKK 1,205. FSP Sundhedssikring FSP Sundhedssikring offers many services, and FSP wants to expand these by yet another offer on a health scheme, because healthy employees are happy employees. This will not only benefit the individual customer, but also the community within FSP and at the workplace as it will result in fewer expenses in the case of sickness etc. As a result, FSP is preparing a new scheme, which offers the customers preventive health in the form of advice and counselling on exercise, preventive treatment by physiotherapists, health seminars, news letters, stress counselling, health examination and exercise in fitness centres. The objective is to launch the new service in 2007. Dækning ved Kritisk Sygdom (coverage in the case of critical sickness) Dækning ved Kritisk Sygdom is a one-year insurance, which pays a tax-exempted compensation (corresponding to a lump sum of DKK 140,000 in 2006) in the connection with a number of critical diseases. In 2006, FSP paid covers to a total of 75 customers against 70 in 2005. These payments were primarily due to different types of cancer as well as blood clots and other blood circulation diseases. FSP has raised the premium from DKK 54 per month in 2006 to DKK 65 per month in 2007. The premium is paid by a special extra dividend from FSP, of which each individual customer pays income tax. As a result, compensation can be paid without tax. The terms of insurance have not been changed in 2006. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=24http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=24Finanssektorens Pensionskasse 25 The customers have preferential rights to FSP’s residential units For a number of years, FSP has built residential units throughout the entire country and at the end of 2006, FSP had 21 residential units and around 1,000 tenancies at its disposal. FSP’s customers and their children have preferential rights to most of these units, but have to pay rent on equal terms with the co-residents. FSP residential units in Denmark Hjørring Brønderslev Randers Århu Vejle Sorgenfri Ringsted Haderslev Næstved Svendborg Hørsholm FSP's properties are administered by Kuben Ejendomsadministration, Dan-Ejendomme and Spar Nord Bolig. In a small number of these buildings, only FSP customers are admitted due to the overwhelming interest in apartments. Customers who wish to state their interest in an apartment can contact one of Kuben’s departments or Spar Nord Bolig. Further information can be found on FSP’s homepage, www.fsp.dk, Kuben’s homepage, www.kuben.dk and on Spar Nord Bolig’s homepage, www.sparnord.dk/privat/bolig/sn_bolig/. Extended cooperation with professional representatives FSP is known to cooperate with the professional representatives of the member companies. When at the general meeting on 27 April 2006, the Financial Services Union appointed the Deputy Chairman in the Financial Services Union, Michael Budolfsen, to FSP’s Supervisory Board, he seizes the opportunity to call for an extended cooperation between FSP Pension, the Financial Services Union and the professional representatives. According to Michael Budolfsen, the Financial Services Union and FSP has a common need for strengthening the professional and collective interests with regard to pension schemes. As a result, he requests a closer dialogue with the Union’s members on the subject of pension. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=25http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=25Finanssektorens Pensionskasse 26 According to Michael Budolfsen, the Financial Services Union experiences that some members are under pressure in transferring pension agreements from the collective schemes in for instance FSP to more individual and more commercial schemes. He does not recommend such a transfer. He thinks that a collective scheme gives the individual pension saver the security of the right covers in connection with disability, in the case of death and savings for the pension age. Moreover, he finds that time after time, collective schemes win against the individual schemes, when considering longterm perspectives. Michael Budolfsen also emphasises that within an investment community, it is possible to achieve large-scale operations, which include adequate prices from professional investment advisors and in security trades. Furthermore, focus will constantly be on the investments. As newly appointed Deputy Chairman in FSP, Michael Budolfsen supports the fact that the pension fund needs to develop, if it is to retain current customers and at the same time attract new customers. Michael Budolfsen’s objective is to ensure that the professional representatives are equipped to discuss pension matters. He thinks that union representatives and employees in the secretariat of the Financial Services Union need further training in order to really comprehend pension matters. FSP Pension has taken up Michael Budolfsen’s challenge and plans to arrange seminars in 2007 for professional representatives of the member companies, so that FSP’s customers are given an even better counselling and guidance with regard to their pension schemes. Michael Budolfsen, Deputy Chairman in the Financial Services Union and in the Supervisory Board of FSP. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=26http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=26Finanssektorens Pensionskasse 27 ACTUARY 18 initiatives on openness and transparency in the pension industry The industry association, Forsikring & Pension, wants to create greater openness and transparency in the insurance and pension industry. At the annual meeting at the end of 2006, 18 initiatives were therefore launched in order to give the consumers a greater insight into the industry and create a better understanding of their own insurance and pension relations. The initiatives apply for all insurance and pension companies and will result in an increase in expenses for small as well as large pension companies. To a large extend, FSP already meets many of the relevant initiatives such as low transfer costs, easy and cheap consolidation of small pension schemes, fast transfer of pension schemes and targeted information. However, there are also new initiatives, which FSP will have to meet in the future. For instance, this applies for the clarification of the correlation between market return on investments and the rate of interest on policyholders’ savings, a more standardised specification of the indirect expenses of the pension scheme to each individual customer as well as a more precise specification of expenses of market rate products. Consequently, FSP’s expenses will also be influenced by the initiatives from the industry association. For FSP the correlation between market return on investments and the distributed rate of interest on savings look as follows: Explanations 2006 Market return for the year 1) Pension investment returns tax 2) Risk profits Expense profits Return on risk after tax 3) Change in market cap regulation Change in collective dividend potential Profits of sickness and accident Guarantee payment 5.6% -0.8% 0.0% 0.0% -1.6% 2.0% 0.0% 0.0% 0.3% 2005 13.5% -1.5% 0.6% 0.0% -5.3% -2.1% 0.0% 0.0% 0.3% 2004 7.6% -1.0% 0.1% 0.0% -1.4% -0.8% 0.0% 0.0% 0.0% 1. Market return for the year achieved on the financial markets (shares, bonds, properties etc.) 2. Pension investment returns tax for the year imposed on pension savings by the Government 3. Return on risk shows the payment, which equity and other capital resources must have. Rate of interest on policyholders’ savings 5.5% 5.5% 4.5% The new customer information could look like this. The customer is given insight into why a result of 13.5 % in 2005 “only” provides an interest rate of 5.5 % to the customer. At the same time, the example shows how the customer still receives an interest rate of 5.5 % in 2006, even though the result for the year is 5.6 % and thus less than the year before. Further information on the 18 initiatives can be found on Forsikring & Pension’s homepage: www.forsikringenshus.dk. BonusKapital (special dividend) makes customers direct owners of FSP’s equity FSP wants to make it more visible that the customers ’own’ FSP’s equity/capital base. Therefore, with effect from 2006 FSP’s Supervisory Board has decided that the part of the rate of interest on savings exceeding 4.5 % is ascribed as “special dividend provisions” – or FSP BonusKapital, which FSP has chosen to name it. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=27http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=27Finanssektorens Pensionskasse 28 In practice this means that this part of the bonus (dividend) is deposited on a separate account in the customer’s safe custody, which can be included in FSP’s capital base. As a result, this part of the customer’s savings is not guaranteed, but in return FSP BonusKapital is accrued interest in line with equity with the market return for the year as addition to the so-called ‘return on risk’. Historically, return on equity has been better than the annual rate of interest on policyholders’ savings, which naturally the customers benefit from. In practice, FSP BonusKapital is paid in the form of increased pension benefits, when each individual customer retires and initiates his/her pension payouts. In 2006, the rate of interest on policyholders’ savings was 5.5 % after tax. This means that one percentage point (gross) of the rate of interest on policyholders’ savings for the year is ascribed to FSP BonusKapital. A customer with savings of DKK 1.5m thus becomes the owner of up to DKK 15,000 of FSP’s capital base. Capital base is in total DKK 3.4b, and at the beginning of 2007 FSP’s customer will be the direct owners of a total of DKK 88m of the capital base of the pension fund. In the future, FSP will continue to distribute BonusKapital. FSP BonusKapital - kunderne og egenkapitalen At the same time, the introduction of FSP BonusKapital is a step away from guaranteed pension benefits and the ties, which these lay on FSP’s investments. The guarantees result in strict requirements of provisions in portfolio investments such as bonds and slow down the opportunities of investing actively in for instance shares. To the pension fund – and thus all the customers – the introduction of BonusKapital means that FSP is freer to invest actively and gain a far better return from a long-term perspective. This is a result of the fact that FSP BonusKapital is not to be included in the guaranteed pension provisions. Development tasks in 2006 In 2006, the actuary has prepared a new pension scheme, in which new customers with effect from January 2007 automatically have their savings placed in FSP WebLink, in which each customer decides, how his/her savings should be invested. Furthermore, the actuary has in close dialogue with our IT department, FDC, prepared a proposal, which offers FSP’s other customers the opportunity of placing their savings in FSP WebLink through a transfer to the FSP Pension department. We expect to be able to give further information on these plans at the general meeting in 2008. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=28http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=28Finanssektorens Pensionskasse 29 Moreover, the actuary has worked on the continued modernisation of the pension scheme in the form of an offer on coverage in the case of disability and death without guarantee. This would mean that the premium can be fixed according to actual matters, and averagely it will be lower than up until now, where the premium is guaranteed and thus fixed with caution in order to ensure enough provisions to cover claims. FSP also expects to be able to give further information on these plans at the general meeting in 2008. In 2006, the actuary has also worked on developing a service portal on the Internet, which is supposed to make it easier for member companies to report and pay pension contributions. The new service portal operates with online information in order to keep data input to a minimum, and the user is immediately made aware of disagreements in data inputs. This will result in fewer errors in reports and payments. The service portal is expected to be introduced to FSP’s member companies in 2007. Payment for guarantees Starting from 2005, FSP introduced payment for the security (guaranteed benefits) which customers have in their pension benefits. This payment was introduced in order to balance an increase in provisions in order to meet the customer’s guarantees and the financial instruments, which were bought to cover the guarantees. The payment for guarantees is distributed on the basis of the size of the basic interest rate. Consequently, costs are larger for high guarantees, because they require larger provisions and a larger extent of interest-rate hedging instruments. The payment for guarantees is subtracted from the individual customer’s dividend. For 2006, the FSP’s Supervisory Board set the following rates: • • • Basic interest rate of 1.75 % - 0.10 % of savings Basic interest rate of 2.75 % - 0.25 % of savings Basic interest rate of 4.50 % - 0.50 % of savings Many customers have several basic interest rates on their pension savings, which results in the fact that FSP subtracts an average of the payments above from the rate of interest on savings of 5.5 % in 2006. • • • All customers admitted after 1 July 1999 have a basic interest rate of 1.75 % and receives a rate of return of 5.40 % in 2006. Customers in department B2 receive return on savings of between 5.00 % and 5.40 % in 2006. Customers in other departments receive return of between 5.25 % and 5.40 % in 2006. FSP expects that the payment will be at the same level in 2007, if the interest level remains unchanged. The Supervisory Board sets both the payment and the annual rate of interest on savings at the end of 2007. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=29http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=29Finanssektorens Pensionskasse 30 INVESTMENTS Highlights on investments in 2006 • • • • • • Total investment return of 7.9 % (gross) and total income of DKK 1.1b. Shares dropped at the end of the first half of the year, but ended positively with a return of 14.8 %. Increase in interest rates resulted in lower bond prices throughout the year, return 1.4 %. Property investments continued the neat earnings with a return of 16,5 %. Financial contracts on commodities contributed with a large return of 34.9 %. FSP Selector funds provided a return in WebLink of 5.5 %, 8.3 % and 13.4 %, respectively. Return FSP traditional (average interest rate) and FSP Selector (market rate) 30% 25% 20% 15% 10% 5% 0% 2003 FSP total return 8.5% 12.8% 7.7% 8.0% 11.0% 10.6% 5.6% 5.5% 17.5% 13.5% 10.6% 8.3% 13.4% 28.0% 2004 FSP Selector – Low risk 2005 FSP Selector – Medium risk 2006 FSP Selector – High risk Active investment strategy with focus on risk diversification In 2006, FSP continued to invest actively and diversify the investment risk by using a wide range of shares. In the course of the year, FSP attached greater importance to investments in shares and properties in its expectation of these assets providing a better return than bonds over time. Shares initiated 2006 with continuous increases in price, but the last two months of the first half of the year considerable falls in prices characterised basically all share markets, and totally, share value fell with approximately 15 %. In the second half of the year, the share markets recovered, and the year ended with a neat total profit on shares. Best returns were achieved among Danish shares and among shares on emerging markets such as Asia, Eastern Europe and Latin America. Moreover, FSP invests in a number of Danish and foreign investment funds – private equity funds – in unlisted companies. In 2005, investments in financial contracts on commodities (industrial metals and energy products) were introduced, and this asset class provided a high return in 2006. During recent years, properties have given a stable and high return, and this also proved to be true in 2006. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=30http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=30Finanssektorens Pensionskasse 31 After several years of rising prices and a falling interest-rate level, bonds turned around in 2006. In the course of the year, short-term interest rates rose by approximately one percentage point, and long-term interest rates rose by approximately 0.5 percentage point. Consequently, Danish and foreign nominal bonds were characterised by a fall in prices, and interest income was just able to counterbalance the capital loss. Risky bonds such as corporate bonds (High Yield) and government bonds on emerging markets provided a somewhat better return, because the risk premium fell, and the rate gab to American Treasury Bonds narrowed. FSP’s total duration 2005 – 2006 7 6.6 5 6.3 5.6 3 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 5.5 6.3 Approximately 50 % of the assets are invested in nominal bonds, and consequently the weak return was an important factor to the total return. Recognising interest-rate hedging, the return for the year was 5.6 % before tax and 4.9 % after tax in 2006. In 2006, FSP experienced a profit on foreign currency hedging and a similar adjustment to holdings due to a fall in foreign exchange rates. The allocation of assets at the end of 2006 is apparent from the figure below: Balance sheet 31-12-2006 1.0% 4.0% 13.4% 25.3% Danish bonds Foreign bonds Emerging Market bonds High Yield Unlisted shares Off-Balance Commodity 2% Foreign currency hedging 20% 3.3% Danish shares Foreign shares 15.9% 16.4% Hedge funds Properties Interest hedging (swaptioner) 8.4% 3.8% 3.0% Other assets (e.g. cash funds and mortgage bonds) 5.4% As part of the active risk management, FSP continued the interest-rate hedging in order to protect equity and keep a comfortable distance to the yellow and red risk scenarios of the Danish Financial Supervisory Authority. Furthermore, the interest-rate hedging allowed FSP to invest in more risky assets and with fewer limitations. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=31http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=31Finanssektorens Pensionskasse 32 The return of the different types of assets ralated to benchmark is shown in the table below. Moreover, the table shows the holdings of each manager in each asset class as well as the risk level (measured by use of the annual standard deviation on the return) for the different assets. FSP’s investeringer i 2006 – opgjort pr. 31. december 2006 Asset type Cash fund Danish bonds Manager EGNSINVEST FSP FSP Europe SEB Europe Aberdeen - Corporate bonds Nykredit - Eurokredit SEB - Emerging Market bonds Sydinvest - Emerging Market bonds JP Morgan – Structured bond JP Morgan – Structured bond II ING – Structured bond TRP Invest - High Yield Danske Bank - High Yield Various funds FSP Northern Trust – European shares State Street – American shares T. Rowe Price – American shares growth shares Frank Russell - American value shares Frank Russell - Emerging market shares Frank Russell – Japanese shares Sparinvest - Value shares FSP properties ei invest nordisk retail Foreningen Fast Ejendom Rockspring PanEuropean Property Dansk Ejendomsfond I A/S Britannia Invest JP Morgan US RE Frank Russell - Hedge funds Nykredit Alpha - Hedge funds Commodities Return 2006 3.0% 0.7% -3.3% -0.5% 2.0% 0.4% 9.3% 7.3% 2.2% -2.4% 2.2% 7.1% 7.7% 17.0% 19.5% 18.9% 3.1% -5.5% 5.7% 17.6% -11.2% 15.4% 8.8% 21.1% 11.0% 11.9% 18.9% 82.2% 0.8% 5.6% 4.0% 34.9% Benchmark 2.9% 0.6% -1.0% -0.4% 2.0% 0.4% 9.9% 7.6% 3.5% 0.9% 1.2% 9.0% 8.5% 11.6% 20.4% 19.5% 3.4% -3.3% 7.7% 18.2% -8.6% 7.3% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 7.2% 8.2% 5.5% Holdning (DKK mill.) 222 5,467 342 906 1,695 168 915 257 116 111 204 331 318 825 1,822 611 619 467 243 556 417 528 1,734 58 27 240 136 435 274 420 290 359 Risk level 0.1% 2.5% 6.4% 2.6% 2.8% 2.7% 8.4% 6.4% 2.0% 2.0% 2.0% 3.7% 3.6% 7.2% 13.0% 7.5% 8.4% 12.0% 8.2% 17.6% 17.8% 9.6% 4.7% 12.6% 8.8% 4.6% 1.1% 9.1% 3.6% 1.7% 5.1% 17.3% Foreign bonds Emerging Market bonds High Yield bonds Unlisted shares Danish shares Foreign shares Properties Hedge funds Financial contracts on commodities Successful investments in properties During recent years, FSP has increased investments in properties, and at the end of 2006 nearly 14 % of the pension fund’s assets were placed in a wide range of business and residential properties in Denmark and abroad. For a number of years, investments in properties have provided FSP with neat and stable returns. Consequently, property investments are a significant part of the pension fund’s investment strategy and risk diversification. Moreover, as one of the few pension funds in Denmark FSP has gained experience in managing its own construction projects. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=32http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=32Finanssektorens Pensionskasse 33 Properties at the end 2006 (14 % of assets) JP Morgan US RE 9% FSP properties 60% Britannia Invest 15% Dansk Ejendomsfond I A/S 5% Rockspring ei invest nordisk PanEuropean retail Property Forening Fast 2% 8% Ejendom 1% Today, FSP owns more than 20 residential properties in Denmark. Often the apartments are in great demand already when the projects are introduced. For instance, this is the case with the newest projects with atrium-type houses in Northern Hørsholm and the apartments on Klosterbakken in the middle of Odense. Cooperation on property investments FSP cooperates with other Danish pension funds on property investments outside of Denmark. In Danish Real Estate Club, FSP meets with colleagues from Pen-Sam, PFA, PKA and SAMPENSION in order to learn more about the European property market, save expenses for advisors and achieve a better return on property investments. Each pension fund makes its specific investments on its own. Danish Real Estate Club has as it is been rewarded the European IPE price for this unique cooperation. FSP also cooperates with PKA and SAMPENSION in Britannia Invest. Britannia own 15 office properties in UK, and in 2006 the company sold a single property with a profit of approximately DKK 150m. In 2006, FSP contributed with further funds to Britannia Invest. The property fund, Dansk Ejendomsfond, which FSP owns together with Nordea Liv & Pension and PBU, invests in office properties in the largest cities in Denmark. In addition, FSP holds ownership interest in Foreningen Fast Ejendom, which invests in a wide range of Danish properties. Moreover, in autumn 2006, the Danish property fund, ei invest nordisk retail, in which FSP is an investor, opened the new shopping centre, Gallerierne, in Hillerød. The fund also invests in properties in Sweden and Finland. Internationally, FSP also invests in a number of property funds owning properties in Europe and the US. PanEuropean Property invests broadly in business properties, and most recently FSP has invested in JP Morgan U.S. real estate, which owns a number of properties for offices, shopping centres, residential properties and industries in the US. FSP is also about to invest in another JP Morgan fund, which invests in a wide range of business properties in Europe. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=33http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=33Finanssektorens Pensionskasse 34 FSP WebLink is among the best in the industry For the fourth year in a row, FSP has experienced good returns on the three WebLink funds, in which FSP divides investments into three risk profiles. In 2006, especially risky investments in shares and bonds on emerging markets provided nice increases in prices, while traditional bonds provided a modest return. Return on funds in "FSP Selector" 2003-2006 30% 25% 17.5% 20% 12.8% 15% 8.0% 11.0% 10% 5.5% 5% 0% 2003 2004 FSP Selector – Low risk 2005 FSP Selector – Medium risk FSP Selector – High risk 2006 10.7% 10.6% 8.3% 13.4% 28.0% Investments of the three profiles are distributed in the following manner: • • • FSP Selector – High risk: 30 % bonds and 70 % shares FSP Selector – Medium risk: 60 % bonds and 40 % shares FSP Selector – Low risk: 75 % bonds and 25 % shares. As it is, FSP’s three risk profiles provide returns in the better end of the scale when compared to similar profiles in other pension companies. This has been proved in independent comparisons in the course of the year. Approximately 2,000 customers have in total invested DKK 77.3m in FSP WebLink, SP WebLink and LD WebLink. In SP WebLink and LD WebLink, four out of five customers have chosen the medium risk profile, while the remaining customers have chosen the highest risk profile or have chosen to manage investments themselves by choosing among 30 different funds that FSP offers at their disposal. In FSP WebLink, three out of four customers have chosen to manage investments themselves. Returns on these funds in 2006 can be viewed in the table below. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=34http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=34Finanssektorens Pensionskasse 35 FSP WebLink – return on funds Asset type Shares, industries Fund BankInvest Biotechnology (PAL) Bankinvest Technology (PAL) ei invest nordisk retail BankInvest the Far East (PAL) Danske Invest New markets Danske Invest Eastern Europe Nykredit Inv. Emerging markets Sydinvest BRIK (started 01.01.07) Sydinvest Latin America (started 01.04.06) Bankinvest Japanese shares (PAL) (started 01.01.07) Danske Invest USA Sparindex US Value Bankinvest Danish shares Danske Invest Denmark (PAL) BankInvest European shares (PAL) Nordea Invest Europe Bankinvest Basis (PAL) Carnegie WorldWide/Global Egnsinvest High Yield Sparinvest Value shares Danske Invest High Yield NI Engros Emerging Market bonds SEB Ashmore Emerging Market Bonds Sydinvest High Tield TRP-Invest Global High Yield (PAL) BG Invest Short-term bonds Danske Invest Long-term bonds, Danish Nordea Invest Direct Nykredit Long-term bonds Sparinvest Short-term bonds Cash fund FSP Selector – low risk, return equity value FSP Selector – medium risk, return equity value FSP Selector – high risk, return equity value Total return, equity value Return at the end of 2006 2.4% 0.2% 21.3% 14.6% 21.6% 33.6% 13.0% 38.8% 34.6% -1.1% 1.6% 8.8% 27.1% 26.4% 16.3% 17.0% 12.5% 12.6% 20.3% 15.1% 1.3% 6.6% 8.3% 7.9% 7.0% 1.9% -0.4% 0.6% 0.5% 1.5% 3.0% 5.5% 8.3% 13.4% 8.2% Shares, emerging markets Shares, North America and Japan Shares, Denmark Shares, Europe Shares, globally Bonds, globally Bonds, Danish Cash FSP selector WebLink Ethical standards in FSP’s investments Pursuant to section 98 in the Danish executive order on financial reports for insurance companies and cross-disciplinary pension funds, FSP is obliged to inform that the pension fund considers ethical and social matters. FSP invests as stipulated in the Danish Financial Business Act with the primary objective of ensuring the members the best possible return with due account being taken of the chosen risk profile. When choosing investment subjects, FSP considers – as part of the general analysis of the company’s financial situation – whether or not the companies display openness in relation to their actions, including ethical responsibility. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=35http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=35Finanssektorens Pensionskasse 36 FSP has chosen to follow the recommendations of ”Netværk for god virksomhedsetik og ikkefinansiel rapportering” (NVIR), which is a network for corporate ethics and non-financial reporting as these recommendations are agreed upon in a report from 2005. Together with more than 50 of Danish business community’s largest industrial companies and financial companies, FSP Pension is a member of the network. The NVIR report includes a gross list of recommendations on ethical matters within six areas: market conditions, environment, employees, human rights, social responsibility and governance. FSP applies the NVIR principles in its dialogue with the managers managing investments for FSP. Furthermore, FSP presumes that as a minimum the companies comply with the requirements, which have been agreed upon by the respective national authorities as well as by acknowledged international organisations. In other words, FSP demands that the companies that it invests in comply with legislation, ethics and moral code of the countries and on the markets, on which they operate. Each specific case is considered individually in recognition that it is very difficult to set specific and objective standards for ethical responsiblility. Thus, FSP finds it more important to be a pension fund with ethical behaviour than a pension fund with ethical guidelines. As FSP invests in an extensive number of companies, we cannot at all times be sure that all investments comply with FSP’s ethical standards. If critical situation arise around a company, the company is given a chance to react and change any critical situations that may arise. The lack of constructive reaction on the company’s side may lead to FSP reconsidering the investment in question. In practice, FSP will dispose of an investment, if it deems that a company is not acting ethically responsible. Recommendations on corporate ethics and non-financial reporting (NVIR) Stakeholders Vision/strategic goal Identification and prioritising of relevant ethical matters Value Culture Integrity Follow-up and internal reporting Handling of prioritised matters External reporting Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=36http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=36Finanssektorens Pensionskasse 37 Publication of ownership interests Pursuant to the same section 98 in the above mentioned executive order, FSP is also obliged to inform whether or not the public has access to information on the size of the pension fund’s shares in companies. Partly for administrative reasons, FSP does not release a list of all companies, in which the pension fund has shares, or the size of these shares. Synergies with regard to administration of investments Throughout 2006, FSP has worked on achieving economies of scale with regard to the administration of investments, including maintenance of written business procedures, as well as reducing the dependency of individual persons for a number of highly specialised tasks, which during recent years have grown markedly in keeping with the continued close public adjustment of the pension industry. The change has been initiated as from the beginning of 2007, and this means that FSP is outsourcing a number of custody and administrative tasks – the so-called mid and back office tasks. In the future, Nykredit Portfølje Administration will attend to the majority of the administration of FSP’s investments. This means that FSP is given access to expertise within many different areas, in which FSP on its own does not have the opportunity of building up the same competences. FSP also achieves a simpler reporting and administration of the investments and at the same time receives the advantages of large-scale operations. Furthermore, the organisational adjustment allows FSP’s financial department to spend more time on strategic and tactical decisions as well as to focus on the forward-looking company strategy and risk management, which is expected to be strengthened considerably as a result of the new procedures in Solvency II. This means that FSP’s financial department can continue to manage investments with relatively few employees and that it is able to sharpen its attention on the general overview and the risk diversification. Investment strategy for 2007 For 2007, FSP is budgeting with an investment return of 5.8 % before tax based on the allocation of assets shown below and the preconditions for return applied by the pension industry. The investment strategy for 2007 focuses on further investments in shares and properties, which during recent years have provided neat returns for FSP, and which are expected to continue to provide good returns in 2007. Investments in Danish, foreign and unlisted shares will constitute a total of around 25 % of assets. Investments in properties are expected to constitute around 15 % of assets. Investment strategy 2007 Balance sheet Swaptions Other assets 1.5% Properties 14.0% Hedge funds 3.0% Foreign shares 14.0% Foreign Danish shares bonds 8.0% 14.5% Emerging Market Unlisted shares 3.0% High Yield bonds 6.0% 4.0% 2.0% Danish bonds 30.0% Investment strategy 2007 off-balance Financial Contracts on commodities 4% Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=37http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=37Finanssektorens Pensionskasse 38 RISK MANAGEMENT AND COMPLIANCE Risks In the executive order on financial reports for insurance companies and pension funds, the Danish Financial Supervisory Authority has established requirements for the procedures of risk management. On this basis, FSP has decided to gather all significant information with regard to risks in this section, where we will describe all types of risks which FSP takes on as well as the management model and management tools we have chosen. FSP’s risks primarily concern the pension commitments given to our customers and the financial risks of the investments. FSP attaches great importance to supervising and managing these risks and the interaction between them. As part of the Danish Financial Supervisory Authority’s risk scenarios – also referred to as the traffic lights – FSP is obliged to calculate the effect of the pension fund’s significant risk factors. The risks are illustrated in a special table for sensitive information, which is calculated in line with the Financial Supervisory Authority’s guidelines and shown on page 42. Insurance risks Pension provisions The pension commitments given to our customers – pension provisions – are set according to the technical basis reported to the Financial Supervisory Authority. According to the Danish Financial Business Act, this basis must be secure and appropriate. Consequently, the responsible actuary must take steps to ensure that the pension company complies with its technical basis etc. and that this complies with legislative requirements. The specification of pension provisions at market value must consider the risks in relation to insurance. This means partly the current interest-rate level and the investments of the pension fund compared to the applied basic interest rate, partly the development of the intensity in the number of customers becoming disabled or dying. Pension provisions constitute DKK 17,308m and are specified in note 12 in the financial statements. Pension provisions 20,000,000 16,000,000 12,000,000 8,000,000 Bonus potential on premium-free policy benefits Bonus potential on future premiums Guaranteed benefits 4,000,000 0 2002 2003 2004 2005 2006 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=38http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=38Finanssektorens Pensionskasse 39 Favourable development in risks for people engaged in active employment Employees within the financial sector constitute a favourable risk group, and thus in 2006 FSP was able to add DKK 47.0m to risk bonus, which corresponds to 0.28 % of the customers’ deposits. Risk bonus is the profit from pension contributions, which the customers pay for insurance covers (disability and early death). The profit arises when fewer people than assumed in the basis of calculation becomes disabled or die while still engaged in active employment. Risk bonus is added to the individual customer’s deposit relative to the way in which the contributions have been used for death and disability coverage. Pensioners do not receive a share of the risk bonus, as there still is a deficit on the risk development for pensioners. This is due to the fact that FSP’s customers live longer than presumed in the G82 basis of calculation. In 2006, there has been a risk deficit of DKK 0.7m after the addition of risk bonus of DKK 47.0m. The risk deficit can be divided into a profit on the disability cover of DKK 29.4m and a loss on the death cover of DKK 30,1m. The result emphasises the statement that this is a very favourable risk group. Reinsurance In 2006, FSP introduced a programme for reinsurance and established a new programme in 2007. The programme is part of active risk management, and the programme is meant to secure FSP’s equity from large claims on disability and death covers, respectively. The size and the strength of FSP’s equity and favourable risk group mean that it is unnecessary to use reinsurance to cover a large share of claim costs. The reinsurance programme also contains a so-called catastrophe cover, which protects equity against incidents, where a large number of the pension fund’s customers are involved in the same accident. The purpose of the reinsurance programme is to secure a stable risk development without large losses as a result of large single claims or catastrophes. Disputes in 2006 FSP attaches great importance to correct and customer-minded claims handling, and among other things this results in very few disputes with customers. In 2006, five complaints were filed against FSP in the complaints board. Of these, however, one was withdrawn by the claimant. In 2006, the complaints board decided in four cases, and two of these were filed against FSP before 2006. In all four cases the complaints board decided in favour of FSP. Furthermore, FSP won a case in the Danish High Court, which in 2004 it also had been successful in, when the case was decided in the complaints board. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=39http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=39Finanssektorens Pensionskasse 40 Investment risks Risk analysis for investments As a pension fund with significant assets, FSP holds great opportunities of conducting the necessary risk diversification, which provides opportunities of long-term investments in order to achieve good returns. However, investing on the financial markets always involves certain risks. These risks cannot be eliminated, but they can be managed and closely supervised, and this is typically done by setting benchmark and defining the framework – for each individual asset class as well as for the interaction between them. FSP also invests in assets that will help protecting equity through a partial hedging on the liabilities side. Legislation and the Financial Supervisory Authority define the general framework for investments opportunities, and in addition to this FSP’s Supervisory Board has defined the investment framework for each asset category. FSP’s Supervisory Board also defines a risk tolerance for investments. The risk tolerance is based on the consideration of being able to provide the customers with a competitive and stable rate of interest on savings in the long run, and at the same time being able to protect the pension fund’s equity. Based on this tolerance – the risk budget – it is the task of the financial department to divide investments between the various assets in the most profitable way. The financial department operates from an investment strategy that is based on the expectations for the return for the year and the risks of the various asset classes, the risk budget. The financial department continuously observes the development in the key ratios determining the risk ratio of each asset in order to be able to find the most efficient composition of the asset classes for investments. The risk ratio for each asset class is shown in the table on page 32. For 2007, the Supervisory Board has raised FSP’s risk budget for investments. This is due to a combination of the continued positive expectations for the share dividends and increased latitude as a result of the increase in equity/capital base. For 2007, FSP is budgeting with a total return of 5.8 % before tax based on the general industrial assumptions for return on the individual asset categories. In the figure below, these assumptions are for comparative reasons also entered into the calculation for 2005 and 2006. Efficient edge and FSP’s strategy (using the return assumptions for 2007) Expected return 2007 2006 2005 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=40http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=40Finanssektorens Pensionskasse 41 The risk scenarios of the Danish Financial Supervisory Authority As part of the risk management in the Financial Supervisory Authority’s risk scenarios, FSP is to determine and continuously report the effect of the significant financial risk factors for a pension company, which are the following: • • • • Interest rate risks Share price risks Currency risks and commodity risks Counterparty risks and credit risks. Any fluctuation in the interest-rate level and structure affects FSP’s return on bonds and other interest-bearing assets. Since the transition to financial reporting at marked values, the marked rate also affects the making up of pension provisions. In the case of a fall in interest rates, FSP will experience a capital gain on the bond portfolio, but at the same time it will need to raise pension provisions when determining the pension commitments given to our customers at marked rate. On the other hand, in the case of an increase in interest rates FSP will experience a capital loss, while the marked value of the pension provisions will be reduced. The effect of changes in the interest rate and a fall in share prices on FSP’s capital structure based on the yellow and red risk scenarios of the Financial Supervisory Authority is determined on the basis of the asset composition at the end of 2006. This is shown in the table for sensitive information below. Table for sensitive information for companies carrying on pension business Event Minimum effect on capital base Maximum effect on collective bonus potential Maximum effect on bonus potential for premium-free policy benefits before change in applied bonus potential on premium-free policy benefits 1,253 Maximum effect of applied bonus potential on premiumfree policy benefits -245 Increase in interest rates of 0.7 percentage point Fall in interest rates of 0.7 Percentage point Fall in share prices of 12 % Fall in properties of 8 % Change in exchange rates by 0.5 %. Likelihood of 10 days Loss on counterparty 8 % Fall in intensity in death of 10 % Increase in intensity in death of 10 % Increase in intensity in disability of 10 % -100 0 179 -151 -39 -4 -60 10 0 10 218 0 0 0 0 179 0 92 -1,180 0 -608 -158 -17 -241 -270 276 -48 0 -234 0 FSP’s risks with regard to properties can be considered partly as interest rate risks, as the valuation of properties is made on the basis of a market related rate of return, partly as risks of price fall due to increased idle running or a decrease in demand. In the Financial Supervisory Authority’s red and yellow risk level, 8 % and 12 % of the market value, respectively, are used as risk targets. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=41http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=41Finanssektorens Pensionskasse 42 Currency risks of FSP’s international investments can be divided into bonds and shares, respectively. The currency risks on foreign bond investments are as a principle always covered, because the currency risk not contributes positively to the relations between return and risk. Euro-denominated bonds can be excluded from this principle as a result of the historically stable exchange rate between EUR and DKK. With regard to foreign shares, there can be a positive relationship between currency risk and expected return/risk, and as a result FSP undertakes a partial hedging of the floating main currencies, USD, GBP and JPY, related to foreign shares. This policy for currency risks results in the fact that FSP’s total currency risks determined according to both the red and the yellow risk level are low and around the area of DKK 4m. FSP experiences credit risks (loss on counterparties) on other bonds than government bonds and mortgage credit bonds. During recent years, FSP has built portfolios containing corporate bonds – including high yield and emerging market bonds. In the risk scenarios (traffic lights) of the Financial Supervisory Authority, these portfolios are considered to be less risky alternatives to share investments, as the continuous additional earnings are a result of credit spreads, which in actual fact are payments for the credit risk. By using financial instruments, a risk arises for the counterparty. In cases where particular large exposures are involved, this risk is covered by the counterparty providing security. This arrangement of providing security is based on agreements that FSP is part of. This could be either the international ISDA agreement or Danish framework agreements requiring security. At the end of 2006, FSP was placed solidly in the Financial Supervisory Authority’s green risk scenario. By closely following up on investments with regard to guaranteed benefits and the Financial Supervisory Authority’s set of rules, this position has been maintained. Consequently, FSP has extensive latitude to invest in more risky assets such as shares, hedge funds and financial contracts on commodities as well as emerging market bonds and high yield bonds. FSP's reserves related to the FSA’s risk levels Recovery plan if below solvency margin requirements Red End of 2006 Yellow Green Equity Solvency margin requirements DKK 0.7b. DKK 1b from yellow light – fall in interest rates DKK 2.5b from red light – fall in interest rates Asset Liability Management The Supervisory Board has defined the risk tolerance for Asset Liability Management conducted in cooperation with external cooperating partners. In 2005, FSP chose to change its risk management policy. In the light of the continued fall in interest rates in the first half of 2005, security of the investment policy was increased – by hedging against the risk of a further fall in interest rates. This was done by using swaptions (options on swaps) in EUR. In 2006, this hedging has been maintained although with a minor adjustment. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=42http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=42Finanssektorens Pensionskasse 43 The hedging protects equity against the strengthening of pension provisions at market value in the case of a fall in the interest-rate level. Consequently, for the next two to four years it is possible for FSP to freeze after-tax interest rates (and thus return) for the next 20 to 30 years at a level around 3.25 %. This can be related to the fact that FSP has an average basic interest rate of 3 % after tax. The underlying principal amount constituted EUR 1.7b corresponding to DKK 12.7m or approximately 70 % of FSP’s pension provisions at the end of 2006. The total premium for swaptions was DKK 0.5b, and these are included in the financial statements at market value of DKK 0.2b at the end of 2006. In the figure below, the effects of interest rate changes on pension provisions and the swaption portfolio, respectively, are shown in the Financial Supervisory Authority’s scenarios for interest rate changes in the traffic light system: Value of swaption against fall in interest rates on FSP’s equity when using the FSA’s traffic light scenario as at the end of December 2006. 3,500 3,000 2,500 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 -2,500 -3,000 3,013 2,528 1,029 583 -222 -1,016 -176 -200 Fall in interest rates -0.01 -0.007 Rise in interest rates 0.007 Interest rate change 0.01 Gain from interest rate hedging Gain from strengthening provisions European solvency requirements for insurance and pension The European union of financial supervisory authorities still discusses a draft on new rules on solvency requirements for the insurance and pension area, Solvency II. In Denmark, the new set of rules on individual solvency is expected to be introduced already by the middle of 2007. Operational risks Business Compliance Assessing risk areas also involves considering operational conditions, including FSP’s written guidelines and the IT systems. In 2005 as well as in 2006, a particular IT review was conducted in FSP, just as special statements concerning IT security were collected from FSP’s external cooperating partners. Pursuant to section 71 in the Danish Financial Business Act, the Supervisory Board is obliged to prepare a number of written guidelines, including business procedures, as well as secure supervision and safety procedures, just as it is the responsibility of the day-to-day management to ensure the necessary separation of functions within the organisation. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=43http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=43Finanssektorens Pensionskasse 44 These conditions are continuously assessed in the Supervisory Board, for instance in connection with the reporting from the external auditors, and the responsible actuary in his/her annual report to the Financial Supervisory Authority goes through the risks within the pension area, which also constitutes a basis for treatment in FSP’s Supervisory Board. As a result of the Financial Supervisory Authority’s latest extended requirements within this area, FSP’s organisation chart was adjusted at the year-end 2005/2006 and again at the beginning of 2007. In the first-mentioned situation, a so-called Business Compliance was established in order to ensure the implementation of the Financial Supervisory Authority’s requirements, including the necessary check routines and separations of functions, and at this point also a special Risk Management function has been established in order to meet the requirements of Solvency II. Moreover, through a number of measures FSP has sought to avoid risks and errors in operations. Among the measures are well-described business procedures and controlling the separation of functions across departments. Competent employees In 2007, FSP wants to improve the HR strategy, which is to contribute to and support FSP’s overall business objectives: The managers in FSP have to be as prepared as possible for handling changes and supporting the strategy and the business objectives as well as leading the employees towards the same goal. FSP wishes to retain, develop and attract qualified employees by being a workplace that offers good opportunities for personal development and compensations schemes in tune with similar schemes within the financial sector. In 2007, FSP intends to continue competence enhancing activities. FSP will continue to operate with appraisal interviews in order to ensure that the pension fund continues to have the right competences at the right place. The situation on the labour market emphasises the importance in making FSP more visible to the outside world. Consequently, initiatives to increase the attention on FSP as a workplace will be considered. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=44http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=44Finanssektorens Pensionskasse 45 FINANCIAL STATEMENTS Profit of approximately DKK 415m in 2006 In 2006, FSP achieved a satisfactory profit before tax of DKK 415.8m. The profit was primarily due to a neat investment return of more than DKK 1.1b and a positive accounting influence of DKK 285.8m at the calculation of the accumulated value adjustment on provisions at the end of 2006. This meant that at the end of 2006, FSP’s equity reached a new record level of DKK 3.3b. Accounting key figures DKK thousands Net profit Assets, total Equity Pension provisions Members 2002 2003 2004 -287,736 470,431 312,994 14,721,084 15,900,129 17,345,887 1,011,841 1,482,272 1,796,402 13,654,994 14,310,965 15,450,325 15,616 15,629 15,617 2005 1,084,148 20,419,339 2,880,528 16,536,856 15,911 2006 415,754 21,621,700 3,296,257 17,311,299 16,410 Balance sheet total of DKK 21.6b At the end of 2006, FSP’s balance sheet total was approximately DKK 21.6b. This involves a growth of DKK 1.2b corresponding to 5.9 %. As at 31 December 2006, investment assets constituted DKK 20.9b and pension provisions constituted DKK 17.3b. Balance sheet total – development 1980 to 2006 DKK mill. 25,000 20,000 15,000 10,000 5,000 0 Revenues and expenditure The pension fund’s total revenues were DKK 2,064.3m in 2006 against DKK 2,961.6m in 2005. In 2006, FSP achieved a gross growth in pension contributions and deposits of 73.4 %, and net contributions were DKK 905.8m in 2006. The large growth was primarily caused by the portfolio transfer from the pension fund, Sparekassernes Afviklingspensionskasse, to FSP. In 2006, continuous pension contribution before labour market contributions constituted DKK 543.4m against DKK 509.5m in 2005. Deposits constituted DKK 408.9m – of which DKK 357.5m were from SAP – against DKK 55.1m in 2005. In 2006, Labour market contributions amounted to DKK 42.8m against DKK 40.2m in 2005. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=45http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=45Finanssektorens Pensionskasse 46 Results from investment activities before pension investment returns were DKK 1,090.4m in 2006 against DKK 2,391.5m in 2005. In 2006, income from land and buildings amounted to a total of DKK 54.4m against DKK 54.6m in 2005. Property operations have been satisfactory in 2006, and the modest fall is a result of the disposal of properties in 2005. Income from interests and dividends constituted DKK 680.5m against DKK 637.0m in 2005. In 2006, investments assets provided a total translation adjustment of DKK 222.6m. Furthermore, FSP had interest expenses of DKK 33.6m. Administrative expenses related to investment activities constituted DKK 30.8m in 2006 against DKK 25.1m in 2005. Final pension investment returns tax for 2006 is calculated to DKK 138.6m. In 2006, total pension benefits rose by approximately 27.5 % to DKK 501.1m. This rise is primarily a result of two conditions. Firstly, the number of pensioners is increasing. Secondly, there has been an increase in transfers to other pension companies. The increase in pension provisions (including bonus and transfer to sickness and accident insurance) constituted in 2006 a total of DKK 792.1m against DKK 1,095.2m the previous year. In this increase a reduction of the strengthening of pension provisions at marked value of DKK 285.8m is included. The change is primarily caused by an increase in the interest-rate level, cf. the figure below. Moreover, a change has been seen in provisions for unit linked insurances in 2006 of DKK 26.6m. Discount rate 4.2% 4.0% 3.8% 3.6% 3.4% 3.2% 3.0% Dec-2005 Feb-2006 Apr-2006 Jun-2006 Aug-2006 Okt-2006 Dec-2006 In 2006, operating expenses increased to DKK 31.7m against DKK 26.9m in 2005. Expenses for operating activities and development of FSP’s member system of DKK 10.4m are included in these operation expenses, including also modernisation of the pension scheme. The increase in expenses is lower than top line growth, which means that the improvements of expense key ratio 1 “expense ratio of premiums” which have taken place in recent years have been maintained. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=46http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=46Finanssektorens Pensionskasse 47 Operating expenses 1998-2005/2006 FSP Pension 160 Life insurance companies 140 Cross-disciplinary pension funds 120 100 80 60 Index 1998 = 100 The graph above shows the development in expenses from 1998 to 2005/2006 for FSP compared to an average for life insurance companies and cross-disciplinary pension funds. Distribution of profit With reference to the Danish Financial Supervisory Authority’s guidelines, FSP is to inform that also for 2006 the rates of interest bonus are determined annually in arrears and that at the time of the determination, FSP aimed at a steady and stable development, which is in tune with sections 20 and 21 in the Danish Financial Business Act With reference to the Financial Supervisory Authority’s set of rules (a executive order on contributions), the actuary has calculated that the realised results for the year are DKK 1.057.0m. Consequently, the Supervisory Board has decided to distribute part of the realised results to the customers in the form of a competitive bonus, and at the same time execute a write-down of the equity shadow account as it is stated in note 11 of the financial statements. Consequently, as note 11 also shows, net profit for the year of DKK 415.8m is transferred to equity. With reference to the executive order on contributions, FSP has reported to the Financial Supervisory Authority that return on equity is provided according to return ratio 1 (return before pension investment returns tax) plus a so-called technical yield, which for 2006 is set at 4 percentage points in FSP. For 2006, in line with the contribution principles, return on FSP’s equity (including the equity shadow account) amounts to DKK 238.7m plus DKK 14.3m, as is apparent in note 11 of the financial statements. At the end of 2007, equity is thus after the write-down of the shadow account into arrears with a total of DKK 8.6 in relation to the insurance portfolio. This can be seen from the shadow account, where in addition to contribution distribution described above, it is possible to cover previous years of missing return on equity, when the realised results allow it. Equity shadow account (DKK thousand) Shadow account, early + Transferred to equity + Return on shadow account Shadow account, end 2003 1,159,372 -360,799 125,616 924,189 2004 924,189 -171,268 94,183 847,104 2005 847,104 -807,449 131,687 171,342 2006 171,342 -177,097 14,305 8,550 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=47http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=47Finanssektorens Pensionskasse 48 Capital base and solvency margin The pension fund’s capital base, which consists of equity and BonusKapital, constitutes DKK 3,384m and corresponds to 19.4 % of the provisions to pension agreements etc. of DKK 17,477m. With reference to capital requirements to cross-disciplinary pension funds, the solvency margin needs to constitute DKK 691m corresponding to 4 % of the pension provisions at the end of 2006. FSP’s capital base thus covers the solvency margin requirement 4.9 times. Analysis of the generation of results Generating results in a pension fund can be divided into four main areas: 1. The difference between the technical interest rate (basic interest rate plus interest bonus), which has been distributed to the customers’ accounts, and the actual investment return after pension investment returns tax and investment costs – named the interest results. 2. The pension fund’s risk results calculated by the pension fund’s actuary in accordance with the technical basis of the difference between the risk premiums, which are included in the membership contributions and the actual risk expenses plus the distributed risk bonus. 3. The difference between the expense contributions retained in the membership contributions and the actual administrative expenses – termed the administrative results. 4. Other items such as changes in special bonus provisions, changes in valuation at marked value, technical results of sickness and accident insurance and results of reinsurance. 2006 951.7 -424.9 -332.5 194.3 35.3 11.0 -47.0 -0.7 21.7 6.2 -31.7 -3.8 189.8 -88.3 285.8 20.4 10.0 0.0 -0.1 -1.8 415.8 2005 2,119.8 -398.1 -419.0 1,302.7 41.0 102.4 -44.3 99.1 20.4 6.0 -26.9 -0.5 1,401.3 0.0 -328.8 0.0 11.6 2.8 -0.2 -2.6 1,084.1 DKK mill. Investment return, net Basic interests Interest bonus Interest results Risk premiums Risk expenses Risk bonus Risk results Allowance for costs Cost bonus Administrative expenses Administrative results Sub-total Transferred to special bonus provisions Strengthening of marked value Other (SAP) Results of reinsurance Acquired/released underlying schemes Regulation of owner-occupied property Results of sickness and accident insurance Results for the year, total Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=48http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=48Finanssektorens Pensionskasse 49 Interest results Interest results show a profit of DKK 194.3m. This is due to the fact that the investment return was higher than the rate of interests on savings. In 2006, capital return was 5.6 % and 4.9 % before and after pension investment returns tax, respectively, while the rate of interest on savings correspondingly was 6.1 % before tax and 5.5 % after tax. Risk results Risk results showed a loss of DKK 0.7m after adding risk bonus. The risk results in percentages of the pension provisions constituted 0.00 % in 2006 against 0.62 % in 2005. Administrative results Administrative results show a loss of DKK 3.8m. Administrative results in percentages of pension provisions constituted -0.02 % in 2006 against 0.00 % in 2005. The expense ratio of premiums is calculated at 3.5 %, while the expense ratio of provisions constituted 0.2 %, which is the percentage rate of the total capital return for the year used for covering operating expenses in the pension fund. Results of sickness and accident insurance The technical results of sickness and accident insurance (critical sickness) became a loss of DKK 1.8m in 2006. Results of reinsurance Results of reinsurance constitute DKK 10.0m against DKK 11.6m in 2005. This item concerns the results after adjusting the value of the underlying policies in other insurance companies. Expectations for 2007 In 2007, focus will be on continuing the activities of improving customer service even more and strengthening FSP’s position in the financial sector. FSP intends to continue to improve the member system and e-business activities. In 2007, we are budgeting with a profit of approximately DKK 200m based on the defined investment strategy and a competitive rate of interest on savings. FSP is budgeting with a investment return of 5.8 % before tax. This expectation is based on the publishment of social conditions from the industry association, Forsikring & Pension, as well as on the assessments that the financial department has collected from financial observers and advisors. In 2007, focus will continue to be on customer growth. The objective is to continue to do business with FSP’s existing customers within the financial sector. Moreover, the objective is to attract new customers to create further potential for economies of scale, and as a result provide further top line growth for FSP. FSP is budgeting with the initiation of a further modernisation of the pension scheme in FSP. As a result, the increases in expenses will continue to rise in 2007 and will furthermore include an increase in the number of employees, who not only will improve FSP’s customer service, but also are necessary in order to be able to comply with the still rising requirements from the Financial Supervisory Authority. At the beginning of 2007, the restricted association, FSP Invest F.M.B.A., was established. The restricted association is supposed to contain a number of departments, which will receive a significant part of FSP’s investments assets. The investment fund, Nykredit Portefølje Administration A/S, has been chosen as administrator of the restricted association. It is the intension that through this new measure FSP’s secretariat will be able to focus even more on achieving the best possible return on investments assets. FSP Invest is a wholly owned subsidiary of FSP Pension, and together these companies will constitute a group. Consequently, the annual report for 2007 will contain financial statements for both the parent company and the group. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=49http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=49Finanssektorens Pensionskasse 50 In 2006, FSP has reinforced its business related cooperation with the member companies by raising FSP’s deposit fund by DKK 85.8m to DKK 221.9m. In 2007, the cooperation is expected to be further reinforced for instance in connection with a number of FSP’s member companies taking out subordinate loan capital through an Irish, listed structure, Amalie 1 Limited, in which FSP has subscribed for “Notes” in one of the four bond tranches financing the borrowing. The cooperation with the member companies is taking place according to ordinary market terms for such transactions. Subsequent to the balance sheet date, no events have taken place, which in any essential way influence the assessment of FSP, and which have not been expressed in the report or in the note to this annual report. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=50http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=50Finanssektorens Pensionskasse 51 SIGNATURES OF THE EXECUTIVE MANAGEMENT AND THE SUPERVISORY BOARD The Supervisory Board and the Executive Management have today considered and adopted the annual report for 2006 for FSP. The annual report has been prepared in accordance with Danish law for insurance companies, including the executive orders of the Danish Financial Supervisory Authority. In our opinion, the accounting policies applied are appropriate, and the annual report gives a true and fair view of the pension fund’s assets, liabilities, financial position and results for the financial year ended 31 December 2006. We recommend that the annual report be adopted by the shareholders at the annual general meeting. Copenhagen, 14 March, 2007 Executive Management Steen Jørgensen Supervisory Board Claus E. Petersen Chairman Michael Budolfsen Deputy chairman Birgitte Hagen Børge Hansen Jan Steen Jensen Ane Marie Holm Nielsen Knud Pedersen Pia Lærke Petersen Steen Pommeritz Hans Erik Rasmussen Tina Rønfeldt Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=51http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=51Finanssektorens Pensionskasse 52 THE INDEPENDENT AUDITORS’ REPORT Auditors appointed by the annual general meeting. To the customers in Finanssektorens Pensionskasse We have audited the annual report of Finanssektorens Pensionskasse for the financial year 1 January to 31 December 2006, which comprises the statement by Management on the annual report, Management's review, accounting policies, income statement, balance sheet, statement of changes in equity, the notes and the cash flow statement. The annual report has been prepared in accordance with the Danish Financial Business Act. Management’s responsibility for the annual report Management is responsible for the preparation and fair presentation of an annual report in accordance with the Danish Business Act. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of an annual report that is free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility and basis of opinion Our responsibility is to express an opinion on this annual report based on our audit. We conducted our audit in accordance with Danish Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the annual report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the annual report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of an annual report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the annual report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Our audit has not resulted in any qualification. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=52http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=52Finanssektorens Pensionskasse 53 Opinion In our opinion, the annual report gives a true and fair view of the financial position at 31 December 2006, and of the financial performance and the cash flows for the financial year 1 January to 31 December 2006 in accordance with the Danish Financial Statements Act. Copenhagen, 14 March 2007 DELOITTE Statsautoriseret Revisionsaktieselskab Søren Dinesen State Authorised Public Accountant Kasper Bruhn Udam State Authorised Public Accountant Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=53http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=53Finanssektorens Pensionskasse 54 ACCOUNTING POLICIES General information FSP’s financial statement is prepared in accordance with the Danish Financial Business Act and the hereto attached executive order on financial reports for insurance companies and cross-disciplinary pension funds (the Danish Executive Order on the Presentation of Financial Statements). Changes in accounting policies In 2006, there were no changes made in the accounting policies. Changes in accounting estimates, generally Measurement of the carrying amounts of certain assets and liabilities is related to estimates on how future events will affect such estimates. The estimates made are based on assumptions that the management considers to be warrantable, but which are insecure. Actual results may consequently deviate from the estimates made. A certain degree of estimates are related to the measurement of balance sheet items which are not listed on an authorised market place i.e. pension provisions, properties and unlisted securities etc. These estimates are described in detail below in connection with the individual items. BALANCE SHEET Tangible assets, equipment comprise purchase of small tools and equipment, office supplies and IT hardware and are stated in the income statement under administrative expenses in the acquisition year. The pension fund’s own equipment as well as equipment related to the pension fund’s properties are activated, if the acquisition cost exceeds DKK 100,000. Equipment is measured at cost and is depreciated by the straight-line method over a period of five years, except IT hardware, which is depreciated over a period of 3 years. Investment properties are measured at fair value calculated according to the rate of return method. Expected future return and established rate of return requirements affect the measurement significantly. The development in the general interest-rate level is thus significant to the estimates made in relation to the establishment of rate of return requirements. Moreover, an external assessor has participated in the preparation of the statement, which has been finally established by FSP’s management. The participation is periodical, and will be repeated when necessary. Ongoing constructions are measured at cost. The pension fund’s owner-occupied property, Amaliegade 27, is measured at revalued amount. In 2006, depreciations of DKK (thousand) 71 has been made on the owner-occupied property. The depreciation period is 50 years. Investments in associates are measured at equity value. Listed equity investments are measured at fair value in accordance with the official prices at the end of the year. Official closing prices from OMX Exchanges, Copenhagen are applied for Danish equity investments. Unlisted equity investments are measured at fair value in accordance with approved procedures, including EVCA standards, and are to a greater extent than listed securities affected by estimates. Information on prices etc. which appears subsequent to the closing of the accounts will be included solely when these are essential to the assessment of the annual report. Units of investment associations are measured at fair value according to the official closing prices from OMX Exchanges, Copenhagen as well as relevant foreign stock exchanges at the end of the year. Danish as well as foreign bonds are measured at fair value according to official closing prices from OMX Exchanges, Copenhagen as well as relevant foreign stock exchanges at the end of the year. Derivative financial instruments comprise unsettled forward exchange transactions, futures and swap contracts. Derivative financial instruments are measured at fair value. All value adjustments are adjusted in the income statement. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=54http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=54Finanssektorens Pensionskasse 55 Investment assets related to unit-linked insurances are assets corresponding to insurances, where the policyholder decides the investment composition himself/herself and also carries the entire investment risk by himself/herself. The assets are measured at fair value according to official closing prices from OMX Exchanges, Copenhagen at the end of the year. All financial investment assets are recognised in the balance sheet on the trade date. Assets and liabilities in foreign currencies are stated at the official closing rates of the balance sheet day. Pension provisions are determined by the pension fund’s responsible actuary on the basis of the Danish Financial Supervisory Authority’s notified technical basis and comprise guaranteed benefits, bonus potential on future contributions and bonus potential on premium-free policy benefits. Guaranteed benefits constitute present value of benefits that are guaranteed to the customer as well as expected future expenses for administration of the insurance, with deduction of the present value of agreed future contributions paid by the customers. Guaranteed benefits comprise an estimated amount for coverage of future benefits from insurance events which occurred in the financial year, but which were not reported at the end of the financial year. Bonus potential on future contributions comprise present value of obligations of providing bonus on agreed contributions which are not yet past due. Bonus potential on premium-free policy benefits comprise present value of obligations of providing bonus on already paid contributions etc. The pension fund states provisions at fair value according to the Financial Supervisory Authority’s term dependent discount rate with a deduction of 5 %. This risk premium is first and foremost intended to cover insecurities/estimates in the pension fund’s risk development, including particularly the pensioners’ life expectancy. The statement is also based on conditions of the pension fund’s relations with regard to risk and expenses. In relation to the customers’ deposits (retrospective provision), life expectancy has increased by three years. As a result, a strengthening is calculated for some pensioners. Similarly, a strengthening is calculated for customers in department B.2, who have a computation rate of interest of 4.5 %. For most pension schemes, fair value of the pension benefit is lower than the deposit. In this way, bonus potential on future contributions and bonus on premium-free policy benefits arise. In the calculation of the size of provisions, it is assumed that the administrative expenses involved when administrating the pension fund’s member portfolio are covered by the cost deduction that strains the policies. Provisions for unit-linked insurances are as a starting point stated as the insurance’s share of fair value of the related investment assets. Claims outstanding provisions comprise benefits past due from insurance events which occurred in the financial year, but which have not been paid or reported at the end of the financial year. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=55http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=55Finanssektorens Pensionskasse 56 INCOME STATEMENT Membership contributions comprise continuous contributions (incl. contributions for unit-linked insurances and transfers from the Special Pension Savings) paid by financial institutes as part of the conditions of employment, a non-recurring contribution and contributions from self-payment. Social security contributions have been deducted from the membership contribution item. Business ceded comprises membership contributions ceded to other companies and the share of pension benefits of reinsurance companies. Income from investment properties comprises operating profit from the properties excluded value adjustments that are stated under the specific items for this purpose. Rental income from owneroccupied property is not included in the operating profit. Positive value adjustments on owneroccupied property are adjusted directly in equity, and the customer share is directly transferred from equity to pension provisions. Negative value adjustments are made through the income statement. Interests and dividends etc. comprise earned and past due interests of the financial year, index revaluation of index-linked bonds as well as share dividends. Translation adjustments comprise value adjustments, sales gains and losses on investments assets, including financial instruments. Realised and unrealised security and foreign exchange gains and losses in connection with value adjustments on investment assets are included in the income statement and are stated as the difference between value of the asset at the beginning of the year attributed the weighted average acquisition cost for purchased assets and fair value of the financial year at the end of the year. Pension investment returns tax comprises tax of the calculated tax basis as well as changes in provisions for deferred pension investment returns tax. Pension benefits (net of reinsurance) comprise non-recurring payments in the case of death and retirement pension, continuous pension benefits as well as exit compensation (net of reinsurance) with deduction of reimbursed pension benefits from the reinsurance. Operating expenses comprise administrative expenses of the financial year, including dues for public authorities and accounting depreciations on tools and equipment etc. Administrative expenses are added to pension business, investment business and non-life insurance business. The addition is made on the basis of the correct use of resources. Retained investment return constitutes the part of the investment return that concerns equity return and a part that concerns non-life insurance business. Key ratios are prepared according to the rules set out in the Danish executive order on financial reports for life insurance companies and cross-disciplinary pension funds. The calculation of the rate of return ratios is made according to a money weighted method, while return per asset type in the return table is for investments assets calculated according to a time weighted method. In the return table, foreign currency hedging is added to the individual investment categories. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=56http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=56Finanssektorens Pensionskasse 57 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=57http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=57Finanssektorens Pensionskasse 58 BALANCE SHEET ASSETS 2006 DKK ‘000 Tangible assets Operating equipment Owner-occupied property 1 Tangible assets, total Investment assets Investment properties Investments in associates Other financial investments assets Equity investment Units of investment association Bonds Secured loans Deposits with credit institutions Other Other financial investment assets, total Investment assets, total 9 Investment assets related to unit-linked contracts Receivables Reinsurance of pension provisions Receivables from members Receivables, total Other assets Cash at bank and in hand Other assets Other assets, total Prepayments Interest receivables Other prepayments Prepayments, total ASSETS, TOTAL 2005 DKK ‘000 Note 1,129 35,571 36,700 1,583 35,840 37,423 2 3 4 5 6 7 8 1,698,726 434,045 4,611,006 5,144,794 8,729,616 1,091 52,368 265,249 18,804,124 20,936,895 77,290 1,422,751 192,800 3,651,746 3,532,167 10,085,970 1,982 112,647 638,799 18,023,311 19,795,722 50,660 328,310 5,043 333,353 332,652 102 332,754 10 74,333 29,525 103,858 156,860 20,053 176,913 111,408 22,196 133,604 21,621,700 164,286 18,441 182,727 20,419,339 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=58http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=58Finanssektorens Pensionskasse 59 BALANCE SHEET LIABILITIES 2006 DKK ’000 Note Equity Revaluation reserves Retained earnings Equity, total 11 Pension provisions Guaranteed benefits Bonus potential on future contributions Bonus potential on premium-free policy benefits Pension provisions, total 12 Claims outstanding provisions Claims outstanding provisions concerning sickness and accident insurance 13 Claims outstanding provisions (net of reinsurance) Claims outstanding, total Special bonus provisions Provisions for unit-linked contracts 14 Provisions for pension agreements and investment contracts, total Debt Debt related to pension agreements etc. Debt to credit institutions Current tax liabilities Other debt Debt, total LIABILITIES AND EQUITY, TOTAL 17,476,922 16,587,516 14,578,370 1,274,166 1,455,408 17,307,944 15,156,731 872,487 500,771 16,529,989 2005 DKK ’000 1,089 3,295,168 3,296,257 1,114 2,879,414 2,880,528 3,131 224 3,355 88,333 77,290 2,559 4,308 6,867 0 50,660 15 14,038 736,062 39,538 58,883 848,521 21,621,700 15,293 799,044 66,317 70,641 951,295 20,419,339 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=59http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=59Finanssektorens Pensionskasse 60 INCOME STATEMENT Note 16 Membership contributions Ceded reinsurance contributions Membership contributions (net of reinsurance), total Income from associates Income from investment properties Interest income and dividends etc. Translation adjustments Interest expenses Administrative expenses related to investment business Investment return, total 19 Pension investment returns tax Investment return after pension investment returns tax 20 Paid pension benefits Received reinsurance cover Changes in claims outstanding provisions Pension benefits (net of reinsurance), total Changes in pension provisions Changes in reinsurance Changes in pension provisions (net of reinsurance), total Changes in special bonus provisions 14 21 Changes in provisions for unit-linked contracts Pension operating expenses (net of reinsurance), total Retained investment return 22 TECHNICAL RESULTS Technical results for sickness and accident insurance Investment return on equity RESULTS BEFORE TAX Pension investment returns tax on equity RESULTS FOR THE YEAR 2006 DKK ’000 909,510 -3,677 905,833 197,243 54,430 680,502 222,602 -33,624 -30,787 1,090,366 -138,649 951,717 -523,309 18,119 4,119 -501,071 -787,705 -4,412 -792,117 -88,333 -26,630 -31,680 -240,621 177,098 -1,829 275,520 450,789 -35,035 415,754 2005 DKK ‘000 524,396 -612 523,784 35,200 54,641 636,987 1,710,393 -20,652 -25,064 2,391,505 -271,663 2,119,842 -406,393 17,641 -4,303 -393,055 -1,089,838 -5,381 -1,095,219 0 -41,493 -26,896 -279,491 807,472 -2,583 315,047 1,119,936 -35,788 1,084,148 17 18 12 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=60http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=60Finanssektorens Pensionskasse 61 STATEMENT OF CHANGES IN EQUITY 2006 DKK ’000 2005 DKK ’000 Changes in equity Equity at the beginning of the year Results for the year transferred from the income statement Income and expenses directly recognised in equity Pension investment returns tax hereof Hereof distributed to members Total income for the year Equity at the end of the year 2,880,528 415,754 -197 30 142 415,729 3,296,257 1,796,402 1,084,148 -258 39 197 1,084,126 2,880,528 23 24 25 Contingent liabilities and security Cash flow statement Pension fund’s management Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=61http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=61Finanssektorens Pensionskasse 62 NOTES 2006 DKK ’000 1. Tangible assets Operating equipment Operating equipment at cost at the beginning of the year Additions of the year Disposals of the year Operating equipment at cost at the end of the year Depreciations on operating equipment at the beginning of the year Depreciations of the year Reversal of depreciation of operating equipment disposed of Depreciations on operating equipment at the end of the year Operating equipment, book value at the end of the year Owner-occupied property Revalued amount at the beginning of the year Value adjustment recognised in equity Depreciations of the year Revalued amount at the end of the year Tangible assets, total 2005 DKK ’000 2,767 0 0 2,767 -1,184 -454 0 -1,638 2,082 1,686 -1,001 2,767 -1,718 -467 1,001 -1,184 1,129 1,583 35,840 -197 -72 35,571 36,700 36,169 -258 -71 35,840 37,423 2. Investment properties Fair value at the beginning of the year Additions of the year Disposals of the year Value adjustment to fair value for the year Fair value at the end of the year Rate of return Lowest Average Highest Rate of return on owner-occupied property Weighted average of rate of return, business Weighted average of rate of return, housing 1,422,751 236,740 -35,883 75,118 1,698,726 1,048,614 81,242 -78,973 371,868 1,422,751 3.0 % 4.0 % 6.0 % 5.3 % 4.8 % 3.6 % 3.0 % 3.9 % 6.0 % 4.5 % 5.0 % 3.3 % Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=62http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=62Finanssektorens Pensionskasse 63 NOTES 2006 DKK ’000 3. Investments in associates Book value at the end of the year FSP owns 32 % of Britannia Invest A/S, whose equity as at 31 December 2006 was DKK 1,377m as well as for the year 2006 had a profit of DKK 635m. Domicile for the company is Copenhagen. 4. Equity investments Listed Danish shares Listed foreign shares Unlisted shares Equity investments, total 1,683,987 1,171,150 1,755,86 9 4,611,006 1,621,230 950,894 1,079,622 3,651,746 434,045 192,800 2005 DKK ’000 5. Units of investment associations 6. Bonds Nominal bonds Index-linked bonds Bonds in foreign currencies Bonds, total The bond port folio’s option-adjusted duration constitutes 6.3 years 7. Deposits with credit institutions Deposits related to fund management agreements Margin accounts, futures Other deposits in banks Deposits with credit institutions, total 8. Other Interest rate swaption Financial contracts on commodities Forward exchange transactions Other, total 5,144,794 3,532,167 5,020,664 446,278 3,262,674 8,729,616 5,623,094 475,659 3,987,217 10,085,970 40,535 2,298 9,535 52,368 45,395 2,291 64,961 112,647 223,167 0 42,082 265,249 633,092 5,707 0 638,799 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=63http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=63Finanssektorens Pensionskasse 64 NOTES 2006 DKK ’000 9. Investment assets related to unit-linked contracts Units of investment associations Demand deposits Investment assets related to unit-linked contracts, total 10. Other assets Balance with other pension funds Property assets etc. Other receivables Other assets, total 11. Equity Equity related to statement of changes in equity Revaluation provisions at the beginning of the year Adjustment for the year Pension investment returns tax hereof Hereof transferred to members Revaluation provision at the end of the year Capital base Capital base, sickness and accident insurance Capital base, unit-linked contracts Capital base, total Capital base as a percentage of provisions Calculated solvency margin, life insurance Calculated solvency margin, sickness and accident insurance Calculated solvency margin, total Shadow account (return on equity) Balance at the beginning of the year Return for the year Employed/transferred Balance at the end of the year Calculated return on equity Employed/transferred Results for the year Realised results for the year 3,296,257 1,114 -197 30 142 1,089 3,354,590 16,000 14,000 3,384,590 19.4 687,968 2,583 690,551 2,880,528 1,136 -258 39 197 1,114 2,850,528 16,000 14,000 2,880,528 17.4 656,375 2,198 658,573 2005 DKK ’000 77,290 0 77,290 47,141 3,519 50,660 0 16,171 13,354 29,525 668 13,931 5,454 20,053 171,342 14,305 -177,097 8,550 238,657 177,097 415,754 1,056,966 847,104 131,687 -807,449 171,342 276,677 807,449 1,084,126 1,838,490 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=64http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=64Finanssektorens Pensionskasse 65 NOTES 2006 DKK ’000 12. Pension provisions Pension provisions Balance at the beginning of the year Changes in provisions for the year Tranferred to sickness and accident insurance Balance at the end of the year Other 1.75 % basic interest rate 2.75 % basic interest rate 4.50 % basic interest rate Balance at the end of the year Distribution of basic interest rate at the end of 2006 2005 DKK ’000 16,529,989 787,563 17,317,552 -9,608 17,307,944 11 318,095 15,931,026 1,058,812 17,307,944 15,448,920 1,089,641 16,538,561 -8,572 16,529,989 0 222,201 15,187,639 1,120,149 16,529,989 Other 1.75 % 2.75 % 4.50 % 1,057,222 1,582 8 1,058,812 Total 14,578,370 1,274,166 1,455,408 17,307,944 Guaranteed benefits Bonus potential on future contributions Bonus potential on premium-free policy benefits Distribution of basic interest rate, total 11 -338,809 13,859,946 555,552 717,032 101,352 1,354,048 11 318,095 15,931,026 Specification of changes for the year Provision at the beginning of the year Accumulated value adjustment at the beginning of the year Value of retrospective provisions at the beginning of the year Membership contributions Accrual of interest Pension benefits Cost addition after accrual of cost bonus Risk profit after accrual of risk bonus Premium to sickness and accident insurance Transfer to unit-linked insurances Transferred to BonusKapital Acquired/ released schemes Other (SAP) Value of retrospective provisions at the end of the year Accumulated value adjustment at the end of the year Pension provisions at the end of the year 16,529,989 -603,568 15,926,421 889,087 842,487 -518,545 -27,651 773 -9,608 -4,012 -88,333 0 -20,406 16,990,213 317,731 17,307,944 15,448,920 -274,755 15,174,165 489,767 811,072 -410,504 -26,213 -99,219 -8,572 -1,284 0 -2,791 0 15,926,421 603,568 16,529,989 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=65http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=65Finanssektorens Pensionskasse 66 NOTES Note 12 continued Changes for the year in pension provisions Changes for the year recognised in the income statement Changes for the year recognised in equity Changes for the year in pension provisions Guaranteed benefits Bonus potential on future contributions Bonus potential on premium-free policy benefits Pension provisions, total Increase in bonus potential on future contributions Increase in bonus potential on premium-free policy benefits Retrospective provision 13. Claims outstanding provision related to sickness and accident insurance (net of reinsurance) Balance at the beginning of the year Changes in claims outstanding provision Balance at the end of the year 14. Provisions for unit-linked insurances Balance at the beginning of the year Membership contributions Accrual of interest Pension benefits Cost addition after accrual of cost bonus Risk profit after accrual of risk bonus Transferred from pension provisions Provisions for unit-linked insurances at the end of the year 15. Other debt Holiday pay obligation Property creditors Derivative financial instruments Taxes due Expenses due Other debt, total 2006 DKK ’000 2005 DKK ‘000 787,705 -142 787,563 14,578,370 1,274,166 1,455,408 17,307,944 -7,600 -310,131 16,990,213 1,089,838 -197 1,089,641 15,156,731 872,487 500,771 16,529,989 -17,860 -585,708 15,926,421 2,559 572 3,131 1,400 1,159 2,559 50,660 20,422 3,109 -646 -178 -89 4,012 77,290 9,167 34,629 6,070 -194 -232 -64 1,284 50,660 2,794 35,828 0 795 19,466 58,883 3,002 33,870 25,284 732 7,753 70,641 All liabilities are due in less than five years. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=66http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=66Finanssektorens Pensionskasse 67 NOTES 2006 DKK ’000 16. Membership contribution Continuous membership contributions, member institutions Continuous membership contributions, self-payers Deposits from the Special Pension Savings Deposits from the Employees Capital Pension Fund Deposits from the pension fund, Sparekassernes Afviklingspensionskasse Non-recurring deposits and instalment plans Social security contributions Membership contributions, total 522,388 20,998 82 16,224 357,516 35,124 -42,822 909,510 2005 DKK ’000 491,007 18,463 31,994 5 0 23,129 -40,202 524,396 Insurances with bonus schemes Unit-linked insurances Group life premiums All contracts are pension agreements underwritten as part of employment agreement. All contributions are from Denmark, the Faroe Islands and Greenland. Member composition Serving members * Retirees Disability pensioners Spousal pensioners Child pensioners Members, total * Hereof inactive members 17. Interests and dividends etc. Interests of securities etc. Indexation of index-linked bonds Return on equity investments Interests and dividend etc., total 889,067 20,422 21 909,510 489,767 34,629 0 524,396 14,337 1,178 266 464 165 16,410 5,070 14,086 989 254 423 159 15,911 4,896 400,602 10,106 269,794 680,502 434,097 5,707 197,183 636,987 18. Translation adjustments Investments properties Equity investments Units of investments associations Bonds Secured loans Other translation adjustments Translation adjustments, total 81,667 403,460 183,361 -516,718 -61 70,893 222,602 395,570 708,068 535,182 171,367 -82 -99,712 1,710,393 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=67http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=67Finanssektorens Pensionskasse 68 NOTES 2006 DKK ’000 19. Pension investment returns tax Pension investment returns tax Adjustment to previous years Changes in deferred pension investment returns tax Pension investment returns tax of returns recognised in the income statement Pension investment returns tax recognised in equity Pension investment returns tax, total Tax exempted reserves, cf. the Danish Pension Returns Tax Act section 7, share of total reserves Share of investment assets, of which returns are included in the pension tax base 2005 DKK ’000 140,860 -2,241 0 138,619 30 138,649 278,999 523 -7,898 271,624 39 271,663 6.1 % 6.2 % 92.4 % 83.3 % 20. Pension benefits paid Lump sum in the case of death Lump sum related to retirement pension Retirees Disability pensioners Spousal pensioners Child pensioners Exit compensations Payment of SP Payment of LD Amount for nominated unmarried partners Funeral grant Pension benefits paid, total 6,006 64,546 214,231 48,672 84,420 3,286 101,609 401 78 0 60 523,309 4,371 49,832 180,960 46,840 74,326 3,165 46,023 224 0 550 102 406,393 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=68http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=68Finanssektorens Pensionskasse 69 NOTES 2006 DKK ’000 2005 DKK ’000 21. Operating expenses Fees and wages Meeting expenses Other administrative expenses Taxes Administration fees Operating expenses, total 26,780 114 3,859 1,168 31,921 -241 31,680 22,782 124 3,330 1,142 27,378 -482 26,896 Further specification of expenses above Staff expenses Payroll costs Pension expenses Other expenses for social security Payroll tax 20,844 2,744 74 2,123 25,785 19,517 2,617 64 2,075 24,273 36 Average number of employees in the financial year Total expenses for management, supervisory board, audit and consultants are allocated as follows: Wages, pension contributions, car, holiday pay etc. for management Supervisory board members’ remuneration and subsistence allowances External consultants (FDC, IT, temporaries, lawyers, doctors etc.) Auditors’ remuneration - Compulsory audit, Pensionskassen - Deloitte - Consultancy - Deloitte 38 2,276 699 14,466 2,175 578 9,945 488 418 556 1,008 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=69http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=69Finanssektorens Pensionskasse 70 NOTES 2006 DKK ’000 2005 DKK ’000 22. Technical result of sickness and accident insurance Membership contribution (net of reinsurance), total Technical interests Value of claims related to critical sickness Changes in claims outstanding provisions Value of claims, total Operating expenses (net of reinsurance), total Investment return Return on pension provisions Technical results on sickness and accident insurance, total Number of damages paid Average damages recovery in thousands Claims frequency 23. Contingent liabilities and security At the end of 2006, registered assets constituted DKK 19,475m. 9.608 99 -10.374 -572 -10.946 -626 135 -99 -1.829 99 136 0,7 % 8.572 48 -9.651 -1.159 -10.810 -576 231 -48 -2.583 91 134 0,6 % The pension fund is not part of any legal disputes which are estimated to disturb the financial position. At the end of the year, FSP Pension has promised a purchase of unlisted equity investments of DKK 1,538m. A promise of underwriting has been given to Amalie 1 Limited for up to EUR 100m, max. DKK 750m A 30-year term mortgage loan secured on real property has been obtained. At the end of 2006, the time to maturity was 28 ½ years. At the end of 2006, market value of these loans constituted DKK 736m. Of the DKK 795m constituting the outstanding debt DKK 738 m are due in more than five years. At the end of the year, gross positions on derivative financial instruments constituted DKK 4,651m. In connection with interest swaptions stated in note 8, FSP has received security on DKK 290m. In connection with mortgage loans secured in properties stated under debt in the balance sheet, FSP has provided security on DKK 781m. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=70http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=70Finanssektorens Pensionskasse 71 24. Cash flow statement 2006 DKK ’000 Membership contributions paid Reinsurance premiums paid Pension benefits paid Operating expenses paid Purchase and sale of tools and equipment, computers, cars etc. Cash flow from pension business Payment from operation of real property Interests and dividend etc. Net investment, financial contracts Expenses paid Cash flow from investment business Social security contributions paid Pension investment returns tax paid Cash flow from taxes Cash flow from total business Net investment, land and buildings Net proceeds, mortgage loans Net investment, equity investmenst Net investment, unit of investment association Net investment, bonds Net investment, secured loans Cash flow from net investments Changes in cash at bank and in hand Cash at bank and in hand at the beginning of the year Cash at bank and in hand at the end of the year 945,550 -3,090 -519,589 -27,673 0 395,198 54,148 693,675 384,495 -30,786 1,101,532 -42,456 -165,397 -207,853 1,288,877 -194,237 -28,190 -603,802 -1,459,415 849,691 752 -1,435,201 -146,324 273,025 126,701 2005 DKK ’000 576,684 0 -400,124 -21,326 -1,532 153,702 52,297 598,640 -683,515 -25,065 -57,643 -40,000 -230,483 -270,483 -174,424 21,504 810,400 -739,318 523,166 -678,289 875 -61,662 -236,086 509,111 273,025 Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=71http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=71Finanssektorens Pensionskasse 72 NOTES 25. Pension fund’s management Supervisory Board Claus E. Petersen Chairman of the Supervisory Board. Managing Director, Den Jyske Sparekasse. Member of the Supervisory Board, Ejendomsselskabet Jelling A/S, Sparinvest Holding A/S, ID Sparinvest A/S, Fondsmæglerselskabet Sparinvest A/S and Sparinvest Systems A/S. Elected Chairman of the Supervisory Board in 2004, 45 years old. Michael Budolfsen Deputy Chairman of the Supervisory Board. Deputy Chairman of the Supervisory Board of the Danish Financial Services Union. Deputy Chairman of Kobæk Strand Konferencecenter A/S. Member of the Supervisory Board since 2006, 43 years. Birgitte Hagen Development Director, Fionia Bank A/S. Member of the Supervisory Board since 2003, 57 years. Børge Hansen Broker. Chairman of the Supervisory Boards of Skandinavisk Brandteknik A/S, Amico A/S, Baltic Towing Svendborg ApS, Svendborg Bugser A/S and Paper Fantasies DECO A/S, respectively. Member of the Supervisory Board of Kroløkke Holding ApS. Member of the Supervisory Board since 1977, 63 years. Jan Steen Jensen Capital Advisor, Spar Nord Bankaktieselskab. Member of the Supervisory Board since 2002, 48 years. Ane Marie Holm Nielsen Department Manager, Spar Nord Bankaktieselskab. Member of the Supervisory Board since 1981, 57 years. Knud Pedersen District Manager, Løkken Sparekasse. Member of the Supervisory Board since 2000, 57 years. Pia Lærke Petersen HR-Consultant, Fionia Bank A/S. Member of the Supervisory Board of Fionia Bank A/S. Member of the Supervisory Board since 2003, 40 years. Steen Pommeritz Managing Clerk, Danske Bank. Member of election committee Danske Kreds. Member of the Supervisory Board since 2001, 59 years. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=72http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=72Finanssektorens Pensionskasse 73 NOTER 25. Pension fund’s management, continued Hans Erik Rasmussen Chief Clerk, Danske Bank. Member of the Supervisory Board since 2001, 55 years. Tina Rønfeldt Bank Clerk, Nordea. Member of election committee Kreds Nordea. Member of the Supervisory Board since 2002, 44 years. Executive management Steen Jørgensen Managing Director of FSP and (winding-up) since 1993, 49 years. the pension fund, Sparekassernes Afviklingspensionskasse, Member of the Supervisory Board of Britannia Invest A/S, ei invest nordisk retail, Ejendomsinteressentskabet Vestervang III and Eqvitec Technology Fund III General Partner ApS. Member of the Committee of Shareholders of Lån & Spar Bank A/S and Fionia Bank A/S. Delegate of Købstædernes Forsikring G/S and Ejendomsforeningen Danmark. Delegate of general meeting in Spar Nord Bank A/S. In accordance with section 80 of the Danish Financial Business Act, the Supervisory Board has approved the managerial office above of the Managing Director. Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=73http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=73Finanssektorens Pensionskasse 74 Specification of assets Carrying amount Beginning 1 Land and buildings, total 1.1 Land and buildings, directly owned 1.2 Property companies, ltd 2,063,953 1,458,590 605,363 End 2,902,767 1,734,297 1,168,470 Net investments 535,306 194,309 340,997 Return in % before tax 16.5% 8.8% 28.5% 2 Other subsidiaries - - - - 3 Other equity investment, total 3.1 Listed Danish shares 3.2 Unlisted Danish equity investments 3.3 Listed foreign equity investments * 3.4 Unlisted foreign equity investments 4,733,963 1,621,230 148,417 2,371,170 593,146 6,821,534 1,683,987 305,042 4,031,587 800,918 1,631,567 -154,925 116,237 1,471,757 198,498 13.9% 16.5% 24.4% 10.6% 13.6% 4 Bonds, total ** 4.1 Government bonds (Zone A) ** 4.2 Mortgage credit bonds ** 4.3 Index-linked bonds ** 4.4 Mortgage credit bonds Investment grade ** 4.5 Mortgage credit bonds Non Investment grade and Emerging Markets ** 4.6 Other bonds ** 12,181,563 3,761,651 5,404,553 480,929 773,409 1,761,021 - 10,903,451 2,021,905 5,617,857 451,312 966,663 1,820,340 25,374 -838,286 -1,561,769 314,580 -27,817 239,448 172,575 24,697 1.4% -1.8% 1.4% 2.1% 2.2% 9.0% 1.5% 5 Secured loans** 2,048 1,132 -1,031 -2.6% 6 Other financial investment assets 7 Derivative financial instruments for securing net change of assets and liabilities 202,080 231,823 24,615 3.0% 633,092 223,167 37,771 -71.9% The rate of return is calculated by time weightening of return per month *: Cash at bank and in hand in pot folio agreements are included in the market value **: Market value includes interest accrued Annual report 20062008-08-11T13:12:24+02:00http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=74http://innovisio.ipaper-cms.dk/FSP/aarsrapporter/AnnualReport2006/?Page=74Finanssektorens Pensionskasse 75 Specification of equity investments, including equity investments in investment associations Denmark The rest of North Europe America South America Japan The rest of Other Farcountries East 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Not distributed 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 16.6% 16.6% Total Energy Materials Industry Durables Consumer goods Public health Finance IT Telecommunications Supply Not distributed Total 0.6% 0.6% 11.7% 1.0% 1.2% 4.5% 10.6% 0.7% 0.0% 0.0% 0.3% 31.2% 1.0% 0.6% 7.6% 0.8% 0.8% 0.7% 2.8% 0.3% 0.7% 0.5% 10.9% 26.7% 0.0% 0.0% 0.6% 0.0% 0.0% 0.4% 0.0% 0.0% 0.0% 0.0% 16.3% 17.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 8.2% 8.2% 1.6% 1.2% 19.9% 1.8% 2.0% 5.6% 13.4% 1.0% 0.7% 0.5% 52.3% 100.0% Annual report 20062008-08-11T13:12:24+02:00