21 Feb 2010

How will pension be worth in Norway?

In order to safeguard and build financial wealth for future generations Stortinget (Norwegian Parliament) resolved the National Insurance Act (Folketrygdloven) in 1967, which established National Insurance Scheme Fund (Folketrygdfondet). This fund has been supporting governmental savings for financing national insurance pension expenditures since establishment and follows until nowadays. Meanwhile, in 1990 Stortinget adopted the Act relating to the Government Petroleum Fund (Oljefondet), which gathers income generated by Norwegian petroleum sector and its main purpose was to counter the effect of the forthcoming decline in income and smooth out the disrupting effects of highly fluctuating oil prices. The petroleum income comes from taxes of companies related to petroleum sector as well as payment for license to explore, State’s Direct Financial Interest (About SDFI)and dividends from partly state-owned and the biggest offshore oil and gas company in the world - Statoil (About Statoil). In January 2006 both funds were combined and one Government Pension Fund of Norway has been existing since that year. This is sovereign wealth fund (About SWF), which means that it is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate and other financial instruments funded by forex assets. The Government Pension Fund comprises two separate funds right now:

- The Government Pension Fund - Global (Statens pensjonsfond utland - SPU, formerly Petroleum Fund)
- The Government Pension Fund – Norway (Statens pensjonsfond Norge – SPN, formerly The National Insurance Scheme Fund)

The unified purpose of The Government Pension Fund is to facilitate government savings to meet the rapid rise in public pension expenditures in the coming years and to support a long – term management of petroleum revenues. From this moment the total income of new Fund consist of not only petroleum activities but also of the return on the Fund’s investments. The investments decisions are made by Norges Bank Investment Management (NBIM), which is a part of the Norwegian Central Bank on behalf of regulations laid down by the Ministry of Finance. NBIM manages the Fund partly internally and partly by engaging external managers and whole responsibility is taken by Ministry of Finance. Every morning goatee-bearded chief executive Yngve Slyngstad (About Yngve Slyngstad) heads to his office at the top floor of Norwegian Central Bank and checks how his Fund is doing. It’s doing very well! In 2009 the Fund had a record return of 25,6% and is the largest Fund in Europe (1,78% of listed European companies) and second in the world (1% of the world’s shares) just after the largest pension fund in the USA (California Public Employees’ Retirement System – CaIPERS). In 31 December 2009 the total value of the Fund was NOK 2.640 trillion ($457 billion), which is enough to cover 25 times polish budget deficit for 2010.

Why does it look so good?

First of all, petroleum sector income – Norway is third exporter of oil and gas (after Saudi Arabia and Russia) in the world. Second, active management. This means long-term investments (30-year horizon), stressed markets, risk-return trade-off as well as economies of scale, targeted strategies and high quality Norwegian organisation. Within active management they use three main strategies: ensure efficient market exposure, create value through fundamental analysis and management of systematic risk. In 2009 equities made up 62.4% of the Fund’s total investments and fixed income instruments constituted 37.6%. This 62.4% is a high level of exposure to the highly volatile and therefore risky non-Norwegian stock and money market, because they don’t want to overheat their domestic economy. Since 2009 they have presented also in Poland (one of the 46 developed and emerging equity market), which makes me feel better, because I support their policy carried out among companies they own stakes (more than 8 300 companies):

- Equal treatment of shareholders
- Shareholders influence and board accountability
- Well-functioning, legitimate and efficient markets

And what sounds paradoxically for a fund based on oil and gas revenues they care about green issues such as climate change, water management and even children’s rights. Although their activism is limited to encourage better social and environmental standards at companies by publication of number of documents explaining how companies should manage, their ideas is honorable in my opinion. Another issue, which makes me feel better is the Fund’s ethical stance. Since 2006 they haven't invested in companies involved child labour, violation of human rights, the production of tobacco, nuclear, chemical and biological weapons. In year mentioned above they kicked out nearly 30 companies, which met these criteria e.g. US retail giant Wal-Mart, because of its labour policies.
The last question I would ask is why they need so much money for almost 4,9 million Norwegians? Whether government should use some part of the petroleum revenues for e.g. the state budget instead of the funds for the future? They speculate this would increase inflation, so they should discuss what degree of these revenues they may use for government spending. In 2009 the government used 5% of GDP from Oljefondet to boost the economy by the state’s national budget. In February 2010 CPI in Norway was about 2,959% and it was increase from about 2,544% last year.
For more performance of the Government Pension Fund – Global see this report.

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