and pension rights arising from pre-2002 contributions. In the 1990s, annual bonuses often exceeded 2.5 percent, but in recent years they have represented a tiny fraction of guaranteed benefits. A new rule was adopted in 2005 whereby bonuses will be allowed only if the bonus equalization fund exceeds 20 percent of total pension liabilities after allowing for the bonus. Based on this rule ATP has decided to allow a 2 percent bonus in 2007 for rights accrued before 2002.

|**Table 3: Annual Bonu**<br>|**ses and**<br>|**Longevit**<br>|**y Provis**<br>|**ions, 200**<br>|**1-2006**<br>||
|---|---|---|---|---|---|---|
|DKK billion|2001|2002|2003|2004|2005|2006|
|Guaranteed Benefits (GB)|206.9|224.2|225.9|264.4|307.1|292.6|
|Bonus Potential (BP)|38.4|17.3|34.9|40.1|51.9|70.1|
|Total Pension Liabilities (TPL)|245.3|241.5|260.8|304.5|359.0|362.7|
|BP/TPL (%)|15.7|7.2|13.4|13.2|14.5|19.3|
|Annual Longevity Provisions (ALP)|8.7|1.2|1.1|3.5|3.9|4.0|
|ALP/GB (%)|4.2|0.5|0.5|1.3|1.3|1.4|
|Annual Bonus (AB)|4.0|0.0|0.3|0.5|0.7|0.7|
|AB/GB(%)|2.0|0.0|0.1|0.2|0.2|0.2|

Source: ATP In its annual reports and its discussion of the need to lower the guaranteed rate and change the basic structure of the system, ATP makes no reference to the historical ex post performance of individual accounts. In its early years of operation, ATP must have used part of its net investment income to build the bonus equalization fund and another part to finance the high pensions, relative to their contributions, that were paid to the first cohorts of retirees. These two measures must have created a wedge between the investment return of ATP and the return paid to individual accounts. ATP uses its bonus policy to protect its members from the wide fluctuations of financial markets and smooth out the pension benefits to its participants. However, there is no indication of the relationship between the average investment rate of return and the average rate paid to individual accounts over successive decades.

The bonus policy of ATP was complicated in the past by the fact that it has been operated as a mixed scheme that was partly funded and partly unfunded with a significant redistributive objective. This reflected a political decision to offer pensions to early cohorts of retirees that were out of proportion to their contributions to the scheme. ATP estimates that it became a fully funded scheme only in the early 1990s. More recently, the bonus policy has been affected by the non-sustainability of the high guaranteed rate that had been retained unchanged until 2002 and the increasing longevity of Danish pensioners. The changes in the benefit system, first in 2002 and the forthcoming one in 2008, reflect attempts to deal with these issues.

# **6. Strategic Asset Allocation**

Investment policy is decided by the BoD and implemented by the Executive Committee and executive management. Before 1990, the portfolio was placed in domestic securities and was dominated by bonds, both government and mortgage bonds. However, during the 1990s ATP increased its equity portfolio from 22 percent to 43 percent (ATP 1999:25). These were split 60/40 between local and foreign equities. The bond portfolio 10