Government Pension Fund: Broad review of Norges Bank’s active management

“We are working on new guidelines for active management that will limit the risk. In addition, we will conduct a new external review of Norges Bank’s risk management and active management. This will provide a basis for a broad assessment in the spring of 2010 of whether or to what extent active management is to be continued,” says the Norwegian Minister of Finance Ms Kristin Halvorsen.

The Government Pension Fund’s expected return and risk are determined over time mainly by the strategic investment choices made by the political authorities in the form of a benchmark. At the same time the managers may deviate to some extent from the benchmark within a certain risk limit. This is known as active management.

While Folketrygdfondet in the management of the Government Pension Fund – Norway achieved excess returns of 3.7 percentage points compared with the benchmark portfolio in 2008, Norges Bank’s management of the Government Pension Fund – Global had a negative excess return of 3.4 percentage points (4.1 percentage points measured in Norwegian kroner). At the same time the risk in the bank’s management was significantly larger than previously anticipated.

The financial crisis entailed major challenges for Norges Bank’s risk management and active management. The bank emphasises that it has learned from the experience and implemented numerous changes. In the Ministry’s view, a more granular system for regulating the risk of active management is nevertheless desirable.

A large part of Norges Bank’s negative excess return is due to active bond management being highly exposed to underlying systematic liquidity and credit risks. A type of risk that rarely occurs, but can be considerable when it takes place, is not captured particularly well by the quantitative “tracking error” risk measure established by the Ministry of Finance. For this reason Norges Bank has also been required to comply with qualitative requirements for risk management systems. In addition to these qualitative requirements that govern active management, the Ministry is assessing new requirements in the form of supplementary measures for risks designed to limit risk in active management.

“We are aiming at a more granular system for regulating and limiting risk in active management. At the same time, the regulations for active management must also provide room for discretion to ensure that the responsibilities vested in the governing bodies of Norges Bank are not transferred to the Ministry in practice. We will follow this up through new management regulations,” says Finance Minister Kristin Halvorsen.

In addition, the Ministry of Finance will carry out a new external review of the status on risk management and the experiences with active management in Norges Bank. This work will build on the Ernst&Young project that reviewed the risk management systems in Norges Bank and was discussed in last year’s report.

“Together with input from Norges Bank on strategies for achieving excess returns, the new external review will form the basis for a broad assessment in the spring of 2010 of whether or to what extent active management is to be continued,” says Finance Minister Kristin Halvorsen.

 

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Read more:

Press releases:

• Government Pension Fund: Long-term management in turbulent times
• The Government will strengthen Norges Bank’s management and control system
• Government Pension Fund: Broad review of Norges Bank’s active management
• Government Pension Fund: Developing and strengthening the ethical guidelines
• Government Pension Fund: Climate on the agenda

Report no. 20 to the Storting