DC steps out
The introduction early in 2001 of a new legal framework establishing more flexibilty for the creation of defined contribution (DC) plans was a step in the development of Norway’s second-pillar pensions. The legislation alllows insurance companies, pension funds, banks and fund management companies to establish DC schemes.
Under the new framework, and in order for the schemes to secure a secured tax status, DC plans must meet some important requirements, such as that all employees at least two years of employment with their employers and working at least 20% of normal time must be covered, retirement age should be not less than 67, and benefits must be taken as an annuity, with a minimum duration of 10 years, with no lump sum payments being allowed. The law also defines limits to contributions and gives tips for employers switching from defined benefit (DB) schemes to the new DC structures.
However, uncertainty regarding specific details of the structure of the schemes and the lack of a more favourable tax framework for these new vehicles have slowed down the take-off of this market, although forecasts for future growth are still positive, with more than 1m Norweigan workers without any form of occupational retirement benefits as potential future members.
The complementary pensions market in Norway is reprented by 130 private pension funds and 23 municipality pension funds with combined assets of €12bn. Around 10% of total assets being managed by the 10 largest pension funds, but insurance companies are still in control of around half of the occupational pensions market as a whole.
Consolidation among providers have been one of the most discussed issues in the market, especially after the announcement of the merger negotiations between the €11bn Kommunal Landspensjonskasse (KLP) – the pension fund for the Norwegian municipal workers – and Statens Pensjonskasse (SPK) – the pay-as-you-go- retirement plan for civil servants. This could result in the creation of the country’s largest life pensions company. Even though the operation hasn’t been finalised and it might take years until the process in completed, the giant public service fund would have around 1.34m eligible members out of a total population of 4.5m. The question now will be to see if as a result of the merger KLP, which manages most of its assets in-house, will have to externalise a larger proportion of its portfolio. If this happens the amount of new assets coming into the market could be considerable and result in a real boost for institutional asset management in Norway.
There has also been considerable interest in developments regarding the €81bn Norwegian Petroleum Fund, run by Norges Bank Investment Management (NBIM). The investment strategies of this huge institutional portfolio have been closely followed by professionals. The latest RFP from the fund was announced in June with the initial tender process being run through the IPE-Quest electronic manager selection system. This latest $5.5bn equity mandate will go to external active managers in five different regions. When Norges Bank last put out an RFP for regional mandates in 1998, it received more than 120 applications from 50 different investment managers.
The fund’s approach to investments, which includes specific sector and geographical considerations, as well as a sophisticated mix of passive and active investment strategies, has attracted interest from other institutions in the country. For those winning the mandates that the fund has awarded during the past couple of years, this could prove to be the key to entering the Norwegian market which has been dominated by local and other Scandinavian players.
In the months to come the Petroleum Fund will continue to be a reference for institutional investors in Norway, which during the last year have been feeling the pressure from poor investment returns. By the end of 2001 some institutions reached quite extreme reserve situations, when falling share prices placed them well below minimum requirement levels, forcing them to make decisions regarding changes to their asset allocation and decreasing the exposure to stocks.
Developments in the DC arena will also be top of the agenda during 2003, which some expect will be the year in which the forecast growth in the industry finally materialises.