Norway’s expects that its long-awaited pension reform allowing defined contribution will come into effect at the beginning of next year. Among the main provisions is that all employers have to provide some type of pension plan for employees.
This is likely to result in the development of defined contribution much more widely. The larger and more established employers should not be affected as they are already providing pensions. So, typically, it will be the smaller to medium-sized companies that will now have to start. Under the current proposals, employers will be required to pay the pension contribution.
Christian Fotland, managing director of consultancy Gabler & Partners in Oslo, reckons that if the initial DC contribution level is 2% of a gross salary employers will tell employees that they will contribute it but that then instead of a 3% pay rise, employees will receive 1%.
Market participants say that just how the legislation will be implemented has not yet been developed fully, so there is uncertainty as to what will actually be put into place. “The likelihood is that more flexibility will be introduced into the system in areas such as contribution levels by both employers and employees,” says Mattias Johansson of Telenor, the telecoms operator’s pension fund. Currently, pension contributions are made to make use of the tax incentives up to the limits allowed. “These will determine the maximum contributions that will be made,” he adds.
Another fund believes that there could be marginal impacts from capital requirements on funds as a result of new pension proposals. “New solvency requirements could be somewhat stricter than current rules, but we do not expect the impact to be significant,” says the pension fund manager of a medium sized fund.
So far there do not seem to be moves to relaxing Norway’s quantitative approach to investment controls in favour of the prudent person approach adopted within the EU pensions directive. “Down the road, we assume there will be moves in this direction,” says the manager, who did not wish to be identified. “This is something we are looking forward to, as we are not that happy about the 35% limit on equities within pension portfolios. We would like to see that adapted to the EU style regulations that will come in the future.”
The current limit has been a constraint on the fund. “The corporate view is that investment in equities is more profitable in the longer run than in other asset classes. Funds in other parts of Europe have a much higher equity proportion than we are allowed to have in Norway,” he says.
Though the new law does open up the prospect of DC schemes spreading, another pensions manager points out that there has been no discussion at company level about moving from the fund’s current defined benefit structure. But once the Pandora’s Box has been opened and the DC concept is fluttering about the marketplace, it can never be put back. As the manager comments: “For the time being we do not see DC coming, but you never know – that could change.”
Undoubtedly, the international accounting standards for pension accounting will have an impact on listed companies’ balance sheets, but the adequacy of funding is not the high-profile issue it has been elsewhere. “There seem to be less funding gaps in Norway than abroad,” comments one company.
No doubt the limited exposure to equities of Norwegian funds played a part here. But the pensions supervisors have been tracking schemes to make sure they are sufficiently funded, and the general view is that Norway is better off than some other countries in this regard.
But Norway’s funds have been hit by developments on the liabilities side due to low interest rates. “It’s hard to tell whether the supervisors have had to tell funds to make additional contributions or not, but most employers have had to pay higher contributions to their funds.”
One group that has had to give a warning about possible contribution rises is KLP, one of a number of pension providers to the municipal sector. The mutual insurer recently said that earlier this year it indicated to its customers that it would be able to reduce pension premiums next year due to its favourable financial position. More recently it issued a contrary statement warning that it had learned that the Financial Supervisory Authority is considering reducing the maximum basic rate further. It states bluntly: “If this materialises, the premiums in all KLP’s pension schemes will increase.” You have been warned.
KLP reports a good first half for this year, where it benefited from an increase in value of its fixed income portfolio as a result of falling interest rates and a “generally good equity markets” resulted in a strong growth in investment income. Total assets increased to NOK146.5bn (e18.4bn) at the end of the second quarter compared with NOK131.5bn in the same period last year. In addition to good international equity market returns, other than the US and Japan, it points to the particularly good returns coming from the Norwegian market in the second quarter.
The Folketryfondet fund is also likely to have had some good performance this year. This is the funded portion of the national insurance scheme designed to provide an opportunity to participate in the growth of national wealth through individual longer-term savings accounts. Its assets are substantial, amounting to NOK175.5bn on a market value basis at the end of last year, of which the equivalent of e5.1bn were in equities. But the fund does not give details of mid-year performance other than through the finance ministry.
“The regulations that control the fund are based on book values, and 20% of the total can be in equities, but with a limit of 20% of this equity limit in non-Norwegian but Nordic equities,” says Rune Selmar of the fund. So with local equity markets doing well, this portion of the fund should have performed well this year. “The balance is in Norwegian bonds,” he points out. Again, the fall in interest rates should have been positive.
On a broader front, the fund says the pension reforms may have some impact on its activities, but nothing has been decided in this regard.
The Norwegian Petroleum Fund is going from strength to strength, not surprisingly given oil price developments and consequent revenue increases. The market value of the fund broke the trillion kroner barrier to reach NOK1.18tn, that is e147bn, up from NOK93.8bn in the second quarter. The fund is bearing down fast on Dutch giant ABP, with some e168bn in assets, as Europe’s largest asset gatherer for longer-term provision.
The increase comprised NOK42.5bn in investment returns and NOK55.1bn in new capital.