Saving for future generations

While many other countries struggle to keep public spending affordable as predictions about future costs of an ageing population give increasingly grim forecasts, Norway has been building up a fund to maintain the welfare system for future generations.

With a size of over NOK3,100 trillion (approximately €400 billion) at 31 October 2011, the Government Pension Fund Global is one of the largest pension funds in the world. But despite its name, the fund does not have explicit liabilities and no official decision has yet been made for what exact purpose the fund will be used.

Manager of the fund, Norges Bank Investment Management (NBIM), deputy CEO Trond Grande explains that the fund objective is to preserve Norway’s oil revenues for future generations. “There is a fiscal spending rule by which some of this is actually being used in the domestic economy but the idea is to really preserve the wealth for future generations.”

As the Government Pension Fund Global is its only mandate, NBIM is not regulated by any regulator, not even the Norwegian ones. Instead, their management strategy is based on a mandate from the ministry of finance, a 30-40 page document prescribing different restrictions but also how different things should be measured, reported and so forth.

Grande says: “What that means is that we are very different from an average pension fund and the average investor who either have regulatory constraint or statutory constraint in terms of their capital ratios, their funding ratios, their solvency and so on. We don’t have anything of that, so we’re actually a different type of investor.”

The oil revenues are put directly in the fund, while all the revenues generated are reinvested in the fund, and the government has put forward a spending rule whereby they can budget for a deficit, but only to the extent of using a maximum of four per cent of the fund in any given year.

The ministry of finance reviews the strategy on an annual basis and publishes a white paper to assess the previous year’s management and address future issues.

One of the decisions made based on the latest white paper, delivered in April 2011, is the increase of exposure to countries outside of Europe. The initial choice to go slightly overweight in European assets was meant to make the fund’s currency exposure more aligned with Norway’s projected future imports from its largest trading partners, in effect protecting the fund from currency fluctuations. But finance minister Sigbjorn Johnsen found that currency risk within the portfolio was relatively limited and that such a heavy concentration in the region is not warranted.

The current investment strategy dates back from 1998, when the fund started investing in equities. Until last year the fund was only investing in equities and bonds, but in early 2010 the fund received permission to also start investing in real estate. It excludes any domestic assets to meet one of the objectives of the fund, which is to insulate the Norwegian domestic economy from any potential adverse effects of overspending.

At the end of September 2011, the fund held 55.6 per cent of assets in quities, 44.1 per cent in fixed income and 0.3 per cent in real estate. The fund eturned 9.6 per cent in 2010, but the latest figures showed a loss of 8.8 per cent in the third quarter of 2011 due to stumbling global stock markets.

Due to the slightly tilted regional allocation towards Europe, the fund is more than averagely exposed to the Eurozone crisis. Grande explains: “If you say that this is a European crisis first and foremost, we would be relatively speaking harder hit than a traditional global investor based on a market cap. But 50 per cent of our equities are in European equities, and 60 per cent of our bond portfolio is in European bonds, so of course we’re very exposed to what’s happening.”

At the fund’s investment strategy summit on 8 November, ministry of finance state secretary Hilde Singsaas said that the ministry continues to look for ways to improve the trade-off between return and risk, by further spreading the investments and by aiming to continue to build on the fund’s special characteristics, such as its size and its long-term investment horizon.

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