Norway waits on legal changes
The Norwegian government has decided to reform its pension system, something that has been repeatedly overlooked due to the county’s prolific income from oil. According to Terje Vamnes, director of pension products at Carnegie there have been some major changes to legislation on DC provision that come into effect in January. The market will be open for DC plans and for mutual funds. “It’s more or less the same changes you saw in the UK market some years back,” he says. Employees in the public sector have an occupational pension plan while only a third of private sector employees are covered. So half the population is, in effect, left without a company pension scheme.
“What we’re seeing is a new market emerging for DC plans. You’ll be allowed separate accounts in a unit link company or a mutual fund and each employee will be given the opportunity to choose the investment profile,” says Vamnes. Norway’s new system is similar to the Swedish PPM system although not compulsory – the decision is left to the company. The legislation has been passed by the parliament but is now with the ministry of finance, which is making a couple of amendments including setting the level of contributions, expected to be somewhere between 5% and 8%.“Norway is now following up what has been going on in lots of other places in Europe by allowing more flexibility with respect to long-term pensions saving,” says Olav R Overland, head of consultants Wassum in Norway.
Consultants are understandably relishing the switch from defined benefit to defined contribution. “The demand for consultants will increase because all the companies have to change their plans to fulfil the new law and this makes a lot of new business for us,” says Anne Grete Steinkje, a consultant at Pensjon & Finans in Oslo. After the new year Norwegians will have individually based schemes and the option to select the investment profile instead of guaranteed schemes. “We are expecting a substantial increase in the savings market,” says Overland.
Changes to the regulations will give a boost to the fledgling consultancy market in Norway. Of the international firms, William M Mercer is the only one with significant presence on the ground. It employs about a dozen people but, as in Sweden, there are no investment consultants. Sweden’s Wassum set up in Oslo in June, having previously run the Norwegian operation from Stockholm. It is already advising on Nkr9bn (E1.1bn). Says Overland: “the Norwegian market is mature enough to set up this business.” There have been funded pension in the municipal sector and been a lot of private pension funds for a long time but during the last two or three years and according to Overland there has been increased international investing, particularly in equities. “There has also been legislation that adds pressure to have a structured investment process and a good strategy,” he says.
Wassum is targeting the pension fund and municipal sectors and the large investment funds. It is also setting up unit-linked strategies in Norway and the Nordic region. According to Overland the market is not used to investment consulting so presenting the concept and getting the message across is one of the greatest obstacles. Nevertheless, he is confident of success: “We’ve entered the market at just the right time.” Other new entrants to the market include a number of Storebrand employees who left to set up Benefit Network earlier this year.
Unlike Sweden and Denmark, Norway hasn’t witnessed a noticeable increase in the amount invested in equities although diversification into Europe, and further afield is very much in vogue. According to the latest Greenwich Associates report on investment management in continental Europe, Norwegian institutions invested 62% of their assets in fixed income and 32% in equities. At the end of 1998, fixed income accounted for 57% and equities for 34%. Equity levels have hovered around a third of total investments thanks to legislation prohibiting insurance companies and pension funds from investing more that 35% in equities. This limit was raised from 20% back in 1998 but according to Roar Snippen, vice president of risk management at Storebrand, Norway’s largest life insurance company, the government has shown no indication it is likely to relax this limit.
Not that this is a popular restriction. “Every life insurance company in Norway is trying to increase their holdings in equity and most are moving towards their 35% limit,” says Snippen at Storebrand, which holds 34% in equities. The Oslo stock exchange is remarkably volatile due to Norway’s reliance on oil. Crude oil’s spot price and the value of the dollar both have considerable bearing on the exchange and this has lead insurance companies and pension funds to diversify out of domestic equities. Due to the exchange’s volatility Snippen says the risk adjusted return has been better outside Norway. Oslo’s stock exchange is also relatively small- 7% of the Nordic region and an eighth of the size of Stockholm’s. “It’s very important for Norwegian pension funds to diversify as Norway lacks a lot of sectors, investments and alternatives,” says Johan Solbu Braaten, managing director of asset management at Carnegie.
Fixed interest rate guarantees to policyholders are preventing Norwegian life insurance companies from increasing their equity investments Life companies need to guarantee 4% return per annum. If booked returns are less than this, they must use other reserves to fulfil their obligation. If the return is still negative, this must be covered by shareholders’ equity. Snippen believes these two elements have held back equity investment in Norway, compared with UK pension funds. “Life insurance companies are today allowed to invest 35% of policyholders’ funds in equities. If we are allowed to invest more, we first need to change the legislation,” says Snippen adding that the government needs to extend the 4% guarantee so it applies over the lifetime of the policy rather than per year. Norway’s Bank Commission is looking at legislation regarding life insurance companies and reporting back to the government next year. “It’ll be very interesting to see what changes they suggest,” says Snippen.
With regard to fixed income, foreign exposure has increased at the expense of domestic bonds, largely due to a lack of supply. Norway’s government has run a budget surplus for the past three years and therefore hasn’t needed to borrow. So, not only are there few bonds to buy but, for the larger investors, there’s a liquidity problem.
In the municipal sectors the local authorities are selling off their shares in local energy companies as part of the Norwegian restructuring of the energy sector. “This means there will be new assets in the region of Nkr5–10bn being reinvested in financial assets and this comes on top of an underlying growth in the savings market in Norway,” says Overland.
Growth in the savings market has helped to fuel mutual funds in Norway. Carnegie is one of the bigger players in the Nordics with Nkr85bn in total assets under management in the region. Over the last year, it has seen its mutual fund business in Norway almost double to Nkr6.5bn and this has helped boost total assets under management to Nkr12bn. Carnegie is planning to launch a unit-linked company and Solbu Braaten is confident there will be a huge rise in the number of unit linked products. At present Den Norske, Storebrand, Skandia and MeritaNordbanken are the main providers of unit linked products and Solbu Braaten predicts there will be the likes of SEB and Handelsbank flexing their muscles. “You’ll see a lot of new players as this market is just beginning,” says Solbu Braaten.
No survey of the Norwegian market would be complete without mention of Norway’s State Petroleum fund. At the end of June the government added a further Nkr40bn taking the total to Nkr304.6bn. According to the fund’s latest report, return during the second quarter was zero and the first quarter return was –1.74%, a reflection of falling prices in Europe, Japan and the US. Ironically, the fund has 40% of its assets in equities, predominantly Japanese, UK and American, and 60% in fixed income and in May the ministry of finance increased the maximum holding in a single company to 3%. Norges Bank, who runs the fund earlier this year appointed ABN Amro to run a European equity mandate, Scudder to run a Japanese mandate and Mellon to oversee a global tactical asset management mandate.
Norway’s department of trade and commerce earlier this year proposed a second fund which would invest predominantly in private equity and would be part privately, part publicly-owned. Norway’s government would be the main sponsor with financial institutional allowed to participate as well. Whereas the petroleum fund only invests abroad, the new fund will hypothetically invest in local companies and is expected to be about a third of the size of the petroleum fund. According to Overland there’s probably a lack of backing from parliament to introduce the fund this autumn. It will be discussed when the budget is up for review in December but at issue is the state’s share which remains unresolved.
Norway has had a quieter year than her Nordic neighbours. Once new legislation is introduced at the beginning of next year, the DC market should take off and with it, the mutual funds business. If the government decides to lift the restrictions on equity investments and to change the fixed guarantee laws, Norway is in for a busy 2001.