Risk management

AP2 must take financial risk in its portfolio management to generate returns and fulfil its mandate. Financial risk is therefore an essential prerequisite for achieving strong long-term returns. The Fund shall maintain a well-diversified portfolio, and risk-taking shall be efficient, well balanced and consistent with the requirement for exemplary management. Risks are carefully managed, controlled and monitored on an ongoing basis.

Risk management, risk analysis and risk control are central elements of AP2’s operations and are integrated into the Fund’s governance. The Board has overall responsibility for the risks in the operations and for ensuring that appropriate processes for internal governance and control are in place.

AP2:s principal risks

AP2’s principal risks are divided into three categories: financial risks, operational risks and impact risks.

Financial risks

Financial risks affect the Fund’s results and are divided into market risk, credit risk and liquidity risk.

Operational risks

Operational risks refer to the risk of losses resulting from inadequate internal processes, human error, system failures or external events. These risks are monitored at least annually through self-assessments, workshops, process analyses and incident reporting.

Impact risks

Impact risks refer to the risk that an investment causes harm to people or the environment without necessarily affecting financial or operational risk. An example is where the Fund’s investments may be linked to human rights violations.

Risk governance

The framework for the Fund’s risk-taking is defined by the investment rules in the AP Funds Act. Each year, AP2’s Board determines the strategic risk framework, which consists of three components. A key element is the range within which the Fund’s assets may be allocated in the strategic allocation. These ranges ensure that the actual portfolio does not deviate excessively from the long-term orientation and the needs of the pension system, while also allowing for medium- and short-term adjustments to improve returns.

In addition, there are two complementary risk constraints. One requires that total risk over time should not deviate significantly from the level implied by the strategic allocation and the needs of the pension system. The other requires that relative risk is also kept within defined limits. The Board also determines the Fund’s strategic benchmark index, which serves as a reference for governance and performance evaluation.

Ongoing risk management, control and monitoring

The CEO is responsible for ensuring that operations are conducted within the defined framework and investment guidelines, and that control and monitoring are carried out daily. To ensure structured risk management and a strong control environment, AP2 applies the three lines of defence model.

First line of defence

Asset management constitutes the first line and owns the risk. This function is responsible for managing risks in the operations, implementing the Fund’s risk strategy and ensuring compliance with limits set by legislation, Board decisions and internal policies.

Second line of defence

This primarily consists of the Risk Management and Compliance functions. They monitor, control and report on the Fund’s risks and ensure compliance with internal and external regulations.

Third line of defence

This consists of an external and independent internal audit function.