Sound Management of the Government Pension Fund

Responsible fiscal policy, high petroleum revenues and good financial returns helped the Government Pension Fund grow to NOK 2 057 billion (about USD 375 billion) as of 30 June 2007.

– I am pleased to see that Norway's responsible budgetary policy and sound investment strategy is strengthening public finances and benefiting future generations. Recent unrest in financial markets is a reminder of the importance of an appropriate and robust long-term investment strategy, says the Norwegian Minister of Finance Kristin Halvorsen.

High financial returns

The Government Pension Fund consists of the Pension Fund - Global (previously known as the Petroleum Fund) and the Pension Fund - Norway. In the National Budget 2008, Minister of Finance Kristin Halvorsen notes that benign financial market conditions and high petroleum revenues have contributed to another significant increase in the Fund.

The value of the Government Pension Fund - Global, which is managed by Norges Bank, stood at NOK 1940 billion as of 30 June 2007. The fund registered a 3.8 per cent return (measured in local currency, -0.2 per cent measured in NOK) in the first half of 2007, of which 0.38 percentage points represents excess returns achieved by Norges Bank relative to the benchmark set by the Ministry. Since 1998, the average annual real return (after costs and inflation) for the Pension Fund – Global has totalled 4.3 per cent.

The value of the Government Pension Fund – Norway, which is managed by Folketrygdfondet, stood at NOK 118 billion as of 30 June 2007. The fund enjoyed a 10.0 per cent return in the first half of the year (measured in NOK), of which 1.4 percentage points represents excess returns achieved by Folketrygdfondet relative to the benchmark.

Investment strategy

- It is our responsibility to ensure that the Pension Fund is managed with a view to achieving high return, given a moderate level of risk. This will ensure that future generations can enjoy maximum level of benefits from the capital saved from Norway’s petroleum wealth, says Kristin Halvorsen.

Following the Storting’s (Parliament) discussion of Report No. 24 (2007-2007), the Ministry has decided to gradually increase the equity portion of the Pension Fund – Global from 40 per cent to 60 per cent. Efforts to improve the risk/return relationship in the Pension Fund are described in the National Budget 2008.

The Ministry has received clear recommendations for the Pension Fund – Global to have a separate allocation to real estate. The advice from Norges Bank and the Ministry’s Council on Investment Strategy is published in the National Budget 2008 (available on www.government.no/gpf). After reviewing key operational issues related to the implementation of real estate investments, the Ministry will conclude in the spring of 2008 in the dedicated white paper to the Storting on the management of the Government Pension Fund.

Folketrygdfondet

From 1 January 2008, Folketrygdfondet will be organised as a separate legal entity, cf. the Storting’s discussion of Proposition No. 49 (2006-2007) to the Odelsting (Parliament) in June 2007. This represents a tidying-up of the regulatory framework, consistent with the efforts to distinguish between the assets in the Government Pension Fund – Norway and Folketrygdfondet as the entity managing these assets.

The main principles in the present organisation of Folketrygdfondet are continued, and no significant changes are intended in the activity of Folketrygdfondet or in the management of the Pension Fund – Norway. There is nevertheless a need for some technical adaptations in the current regulations. The Ministry also intends to specify a benchmark portfolio with a limit on permitted deviations, as is currently the case with the Pension Fund – Global. There will thus be a clearer distinction between the outcome of the Ministry's investment decisions and the outcome generated by Folketrygdfondet through its management of the Pension Fund – Norway.

APPENDIX:

Background information on the Pension Fund

The Government Pension Fund was established in 2006. The fund consists of two parts: The Government Pension Fund - Global, which is a continuation of the Petroleum Fund, and The Government Pension Fund - Norway, which was previously known as the National Insurance Scheme Fund. The purpose of the Government Pension Fund is to facilitate government savings to fund the pension expenditure of the National Insurance Scheme, and to strengthen long-term considerations in the allocation of government petroleum revenues.

To ensure that the petroleum revenues are contributing to the stable development of the Norwegian economy, the revenues shall be phased into the economy gradually, whilst the savings capital shall be invested outside Norway. The Government Pension Fund - Global contributes, by investing a significant part of the petroleum revenues abroad, to a capital outflow that offsets the impact of large and varying foreign exchange inflows from the petroleum sector on the Norwegian krone exchange rate.

The savings of the Pension Fund take the form of general fund accumulation. The Fund is fully integrated with the Fiscal Budget, in order to facilitate growth in the fund being a reflection of the State’s actual accumulation of financial assets. The Government Pension Fund does not have its own executive board or administrative staff.

Under the Pension Fund Act, the Ministry of Finance has been charged with managing the Fund. The Ministry determines the general investment strategy of the Pension Fund, as well as its ethical and corporate governance principles, and follows up on its operational management. The Government Pension Fund is a financial investor and adopts a long investment horizon. The management responsibility includes ensuring that the Fund is managed with a view to maximizing return, given a moderate level of risk. This enables future generations to draw the maximum possible benefit from our savings capital as well. At the same time, we share responsibility, as investors, for the conduct of the companies in which the Fund invests. The Government is therefore concerned that ownership interests in the companies in which the Fund invests is exercised with a view to promoting good and responsible conduct, showing respect for human rights and the environment.

The Pension Fund is invested in securities issued by many different states and by companies in many different countries. Consequently, the risks facing the Fund are well diversified. The expected return and risk of the Pension Fund is in large part determined by the Ministry’s guidelines on how funds shall be invested. Norges Bank and Folketrygdfondet have been charged with the operational management of the Government Pension Fund - Global and the Government Pension Fund – Norway, respectively, within the guidelines laid down by the Ministry.

The management of the Government Pension Fund is subject to a high degree of openness. The Storting (Parliament) is apprised of the investment framework and the Ministry’s follow-up of the Pension Fund on a regular basis. Operational management performance is also reported by Norges Bank and Folketrygdfondet on a regular basis. This is emphasised by the Ministry for purposes of strengthening the credibility of, and confidence in, the Fund and the fund structure.

The Government Pension Fund is one of the largest funds in the world, and its assets are growing rapidly. The Fund is large relative to the size of the Norwegian economy, and the return on the Fund will make considerable contributions to the funding of State expenditure in coming years. Focus on the management of the Fund has increased in line with the growth in its size. This underscores the importance of ensuring that the investment strategy of the Pension Fund, and its ethical and corporate governance guidelines, has the firm backing of the Storting. This is backed by the Ministry's thorough reports on its follow-up of operational management.

More information on the Fund is available on the Ministry's web site.