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IPE special report May 2018

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Norway SWF should be spun off from central bank, commission says

Norway’s NOK8.1trn (€855bn) oil fund should be managed separately from the country’s central bank now that it has grown so big, a government commission has proposed.

The Ministry of Finance announced last week that a commission set up to review Norges Bank and the Norwegian monetary system had recommended that the oil fund be managed by a separate statutory entity.

Currently the Government Pension Fund Global (GPFG) – Europe’s largest sovereign wealth fund – is managed by Norges Bank Investment Management (NBIM), which is part of Norges Bank.

Svein Gjedrem, chair of the commission, said: “Both central banking and investment management place greater demands on the board, senior management, and the organisation than earlier.”

The GPFG has doubled in size in the past five years as a result of the country’s revenue from its petroleum activities and investment returns. At the end of 2012 it had NOK3.8trn under management.

Gjedrem said the two activities – central banking and investment management – differed in nature, and the scope of the tasks involved was substantial. 

“With two separate entities, the professional competence and the governing bodies can more easily be tailored to the task at hand,” he said.

In the report it has presented to the ministry, the commission proposed that NBIM be set up as a separate statutory entity along the lines of the Folketrygdfondet, the manager of the GPFG’s smaller counterpart, the Government Pension Fund Norway (GPFN), which invests only in the Nordic region.

The new entity should have a government-appointed board, the commission said. The Ministry of Finance would continue to define the fund’s investment mandate, and parliament would still approve important changes to that mandate.

Gjedrem emphasised that the proposed separation had to be carried out “in a sound manner and must not in any other respect affect the framework for the fund”.

Fund split ruled out

The commission cautioned against dividing GPFG into several entities, arguing this would entail extra costs and management challenges.

The ministry said: “It is not meaningful in this case to create competition between government-controlled investment entities.”

In neighbouring Sweden, the separation of the country’s national pensions buffer capital into several funds – the AP funds – has often been a matter of public debate.

“The commission would also caution against using the fund as an instrument of foreign policy, business policy, regional policy, or environmental policy,” the ministry added.

The commission also warned against the fund becoming “a government budget number two” for purposes not prioritised in the annual budget process.

In order to safeguard the fund’s role in overall economic policy, however, the commission proposed that the fund’s goal was defined in the Government Pension Fund Act in a way that emphasised its function as a source of financing of the welfare state across generations. 

“The requirement of the highest possible return at an acceptable and carefully weighed risk level is thus of particular importance,” the commission said.

The GPFG had to be a responsible investor, and its current practice of investing abroad should be established by law, it added. Gjedrem said: “This would reflect the fund’s role as a pillar for financing the welfare state and its role as a savings fund for the nation.”

The GPFG is the third-largest institutional investor in the world, according to IPE’s Top 1000 Pension Funds report for 2016.

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