It has been a dark year for the Nordic pensions industry. And it is no secret that many of the region’s investors have struggled to stay afloat. Even before the markets came tumbling down in mid-October, some pension funds were rapidly closing in on the solvency boundaries and had lost almost a tenth of their assets over the first six months of the year.

In many ways, the world has changed during the crisis. Not only have we seen the end of some of the region’s best-known investment houses, but the crisis is also likely to have had a long-term effect on investors’ behaviour as pension funds are forced to reassess their investment strategies. While the regulatory and solvency pressure may have eased slightly after the rules in several Nordic countries were liberalised this autumn, a range of issues remain unresolved.

Many believe that there will be a return to a simpler way of investing. The investment universe has become increasingly complicated and sophisticated, and Nordic funds have been eager to take on a wider range of asset classes and more complex vehicles. That trend seems to have come to a halt. In its place, safety, security and transparency are emerging as some of the key concepts. Pension funds will be looking to invest in products they actually understand and with managers they can trust.

“I think it’s inevitable that there will be a massive flight to security and quality. People don’t seem to learn much from others’ mistakes and experiences, but everyone in the market is living this crisis so it will probably have a profound impact on investors’ conduct. I think the mindset has changed permanently – at least for the next 5-10 years,” says Asgeir Thordarson, head of the Nordic region at Fidelity International.

Rune Sanbeck, head of Nordic business at Barclays Global Investors (BGI), is also convinced that the financial crisis will make pension funds reassess their investment strategies and put more focus on risk management.

There are three factors that underpin the move to security, according to Mr Thordarson. Firstly, he believes that investors will be going back to basics when it comes to investment tools and will be looking for simpler and more transparent approaches. Some complex over-engineered structures like the packaging, repackaging and re-repackaging of credit, have created an air of opacity that investors will shy away from. He also thinks innovation will slow down and that it will no longer be the next exotic idea that will get pension funds’ attention.

“The focus will be on simple and transparent products, where they understand the mechanics. Secondly, I believe there will be a move back to people and experience and in trusting people’s judgement. I don’t think it will be the end for models or quant approaches, but they will be used in a very different way. Drawing on experience will be much more powerful than drawing on a backward-looking model,” Mr Thordarson says.

Lastly, he is convinced that the importance of infrastructure and risk management will increase. While some have been client driven, the regulators will also be looking for tighter control. Investment houses therefore need to put much more effort into infrastructure and compliance matters, which he believes some of the smaller firms may find difficult to do.

The back-to-basics approach to investing is already visible in some investors’ conduct. Finnish pension company Ilmarinen’s newly appointed deputy chief executive officer and head of investments Timo Ritakallio says that, for its equity investments, the firm has returned to its area of expertise and is focusing its attention on the domestic market.

However, the fact that investors are beginning to put more emphasis on security and transparency does not impress some in the industry.

“They should have been doing that the whole time. As long as the returns were attractive, transparency didn’t matter that much. They didn’t ask those questions a year ago,” says Jan Eggertsen, director of business development in northern Europe at T. Rowe Price.

The tactic of investing in these complicated new instruments has certainly proven costly for some. There are indications that some Norwegian local government pension funds may have lost large chunks of their pensions assets by investing in collateralised debt obligations (CDOs). Several of those pension funds have, for example, invested in Obligationsforetaket III, which through its exposure to CDOs seems to have lost most of the assets invested.

A shift towards simplicity could also have an impact on the structure of investment organisations. Peder Hasslev, chief investment officer at Swedish AMF, believes there will be a return to a more elementary method of investing.

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