As the reform of Norway’s public sector pension scheme beds in, consultancy Gabler said it believes more of the country’s municipalities will now think seriously about setting up their own pension fund.
Arne Gunnar Holvik, head of pension funds at the firm, told IPE: “Gabler is seeing several pension funds enjoying a big impact from rebalancing strategies and good manager choices.
“All in all, Norwegian municipalities will have much a better pension situation financially if they use a pension fund – that is my clear belief,” he said.
“We believe more people will take the idea of establishing a pension fund seriously,” he said.
Competition in the municipal pensions market is potentially opening up in Norway, mainly as a result of the new pension scheme for public-sector workers, which came in a year ago.
A hybrid arrangement, the scheme has lower barriers to entry for new providers than its predecessor – the existing defined benefit (DB) scheme.
But according to the collective agreement surrounding the scheme, firms bidding for outsourced municipal pensions are required to offer both the new product and the old, which has higher solvency requirements.
Holvik said competition in the municipal pensions market had been scant for two main reasons: the fact that local councils had not been obliged to tender the management of their pension schemes, and the so-called lock-in effects that had existed in the product run by KLP – by far the biggest provider of outsourced municipal pensions.
“The situation is still that the municipalities are not obliged to put out tenders, but some of the lock-in effects in KLP are gone,” he said.
As a result, he said, more Norwegian municipalities and county municipalities were now expected to launch tender processes.
But apart from changing pension provider, setting up their own pension fund was also an option for some local councils looking for better value, according to Holvik, who said there were several benefits to having a pension fund.
“First, perhaps contrary to what you might think, the costs of running a separate pension fund are competitive compared to the costs of the life insurance companies,” he said.
But he said the most important point had to do with the fact that with the KLP product, the risk result was shared between customers within the collective.
“Some municipalities, for example, have a high number of disabled employees, while others have a low number.
“In practice, this means that a municipality with good, streamlined HR work, with a low number of disabled people, pays the price for municipalities with a high number of disabled people,” Holvik said.
“So it’s important for a municipality to know where they are on the ‘disability scale’ – something Gabler has expertise in,” he said.
In Norway, he said pension funds had better average returns than life insurers, and that these figures were well-documented by the Norwegian FSA.
“The reason for the better management results is, on the one hand, that the management is probably higher quality, but also that a pension fund can move quickly, for example, they can rebalance assets when the market dictates that they should,” he said.
Holvik said several pension funds had been established within Norway’s municipal sector in recent years, and that more local authorities would now consider the option seriously.
As an example, Holvik said Stavanger decided some time ago that it would consider setting up its own pension fund, and that this should now be an option open to the municipality.
Following Norway’s municipal reform, in which many local authorities merged to form larger units, Holvik said there were several municipalities which should clearly be considering a pension fund.
“Much will probably depend on whether the advisers in the market guide the municipalities in a serious way, not least informing them about pension funds,” he said. Holvik said advisers and insurance brokers in Norway seemed to have low competence levels regarding pension funds.