NORWAY - A giant Norwegian pension fund along Dutch lines, encompassing the Government Pension Fund as well as cash from the sale of the state's stakes in large companies and privatisations, has been proposed by an official at Norges Bank.
The idea comes in a 35-page staff memorandum by the central bank's Gunnvald Gronvik, although it is stressed that it should not be taken to represent the bank's own views.
Gronvik suggests the "extraordinary fiscal position" due to Norway's possibly peaking oil revenues could lead to the formation of a legally separate pension fund based on the ‘prudent person' approach.
The Netherlands is used as a model as like Norway it is a small open economy with similar demographics and relatively small and illiquid securities markets.
Gronvik argues the two existing branches of the government fund (Global and Norway) "represent a substantial basis for legal funding of pensions". Such a move would help ease political uncertainty over pensions: "Legal security for pensions can only be provided by some entity outside the annual government budget."
And a funded solution would "lead to a larger growth in the securities markets and the institutional investment sector in Norway that what follows from the pension reform".
The study states: "Large parts of the public pension obligations could be transferred to a legally independent pension fund if one is willing to use the possibilities the extraordinary Norwegian fiscal position gives to finance the transformation".
It adds that the possibility of setting up a fully funded pension scheme - which by nature is sustainable - has not been studied fully in the process leading up to the recent reform."
It states: "Here it is shown that it is feasible to establish a fund that takes over a defined part of the obligations of the National Pension Scheme.
"After the initial establishment of a pension fund the supplementary pensions, the building up of pension rights would for the larger part be based on individual premiums calculated on an actuarial basis."
To fully replicate the Dutch approach, the Norwegian fund would have to sell foreign bonds and invest in domestic equity and bonds, although may not be the best strategy in the circumstances Gronvik acknowledges.
Any new fund would change the government budget in several ways. On one hand the direct pension bill would be reduced, but capital income will be cut and there will be new expenditures.
There is no distinction made between the general pension obligations of the government and the obligation is has towards its own employees. The report states: "The obligation towards the state employees should be regarded as a normal occupational pension scheme placed in a normally regulated state employee pension fund. This would place the state as an employer on equal terms with the municipal and private sector."
With an immediate introduction of a fully funded pension scheme, there will be no need t have different rules applying to different age groups of the population.
A swift change to a new pension system would be "cost effective".
The funding proposal would reduce the premium to the National Insurance Scheme by 6-8% and introduce a premium of the same size to a compulsory pension fund.
The study acknowledges there could be "dramatic" implications for Norway's securities markets.