An upturn in the equity market in tandem with some astute use of hedging instruments saw two leading Danish pension funds achieve strong returns for 2005, with state supplementary pension provider ATP achieving its highest figures since 1964.
ATP's return of 20.4% was the result of impressive equity performance last year, combined with "significant income" from its use of interest rate hedging, gave the fund a fillip as it reported using international financial reporting standards for the first time.
As a non-listed company there is no requirement to report under these standards but ATP's chief actuary, Chresten Dengsoe, said that the company wanted to encourage others to follow its lead.
"ATP invests in a lot of companies all over the world and we like them to use this standard - so we thought that it was time we took the medicine ourselves."
Danish pension funds will face pressure to maintain their high returns in 2006, particularly in the light of a large influx of foreign capital to the country's small equity market.
ATP has even taken the step of legal action against Danish telecoms provider TDC, of which it owns 5.5%, in an attempt to block a compulsory buy-out of its stake by a consortium of private equity firms.
For the third year running, ATP reported strong returns on its interest rate hedging programme, but Dengsoe said that this was purely an exercise in matching its liabilities following the move to market-consistent valuations three years ago.
Of ATP's total return on its assets of Dkr63.1 billion, nearly half (Dkr30.7 billion) coming from its interest rate hedging activities - a figure that exactly matched the Dkr30.7 billion increase in its liabilities resulting from falling interest rates.
The use of derivatives had a similarly positive impact on health industry provider PKA, which posted an impressive 18.4% growth average across the eight funds that it manages, following increased use of hedging tools.
Mark-to-market accounting techniques - introduced by PKA five years ago - and the resultant matching of assets to liabilities have paid off for the Danish fund manager, with over 30% of its investment gains occurring through derivative transactions.
The remainder of the gains came from an upturn in the equity market, with Danish equities return of 47% providing the biggest gains.
PKA's investment returns were only bettered by the economist and lawyers pension fund JOP's performance. JOP reported a return of 21.5%, but this performance was largely due to the revaluation of its real estate portfolio, a move which realised a 91% return.
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