Norway’s main municipal pensions provider has announced it is reversing the board decision made earlier this year to effectively give NOK10.8bn (€1.5bn) of 2019 investment profits back to clients, and, following new regulatory guidance in the light of the coronavirus crisis, will instead use the bulk of this to shore up its reserves.
Kommunal Landspensjonskasse (KLP) announced its board of directors had changed the allocation of last year’s profits, adding NOK2.84bn to the customer premium fund for local authority and health service clients, with NOK8bn being earmarked for its “additional provisions” (tilleggsavsetninger) reserve pool.
A month ago, the mutual pension provider – which is incorporated as a life insurance company – said it would use 2019’s “good result” within the public service occupational pension to transfer NOK10.8bn to the premium fund and put just NOK100m into its buffer reserves.
Egil Johansen, chair of KLP’s board, said: “It is important for us as owners that KLP gives priority to maintaining good solidity in the troubled times we are in now.
“By taking this approach, we are just strengthening KLP’s solidity, and positioning the company for good asset management in the future,” said Johansen, who is a councillor in the municipality of Tønsberg.
KLP said the change meant that less money was being added to the customer premium fund than had been decided in February, but that this sum was still significantly more than had been projected last autumn.
“The reason the board of directors has changed the allocation of returns is the extraordinary financial uncertainty we are now in,” KLP said, adding that the Norwegian FSA (Finanstilsynet) had also asked all life companies to reconsider how the profit for last year should be distributed.
KLP’s customer premium funds are used to hold extra profit set aside in years where investment returns are strong, and can only be used for the payment of premiums.
Additional provisions, meanwhile, are returns on profits that are allocated to insurance customers, but that can only be used by the insurance company to cover a shortfall in a guaranteed annual return due to a customer.
The FSA wrote to Norway’s insurance groups at the beginning of last week saying it expected corporate boards to reconsider their allocation of profits for the 2019 financial year, based on the crisis and the economic uncertainty that now existed.
“Furthermore, the Authority expects the boards, based on these assessments, to submit, if necessary, new proposals to the company’s general meeting on dividend payments and other distributions,” the regulator said.
FSA Director Morten Baltzersen and Ann Viljugrein, director of banking and insurance supervision at the authority, wrote: “The outbreak of the coronavirus and the measures taken to limit infection have had serious financial consequences and triggered great turmoil in the financial markets.”
The economic outlook was very uncertain, and a serious economic downturn now had to be taken into account internationally and in Norway, they said.
The crisis and uncertainty were also reflected in extraordinary support measures from political authorities and central banks to stimulate the economy, they said, including a reduction in central banks’ key rates.
“A significantly lower interest rate level will particularly affect life insurance companies with guaranteed liabilities, and these companies are also significantly affected by the turmoil in the financial markets,” Baltzersen and Viljugrein wrote.