The Government Pension Fund - Global: 2008 is the worst year in the history of the fund

- The results of the Pension Fund – Global, which were presented by Norges Bank today, show that the Fund in 2008 was strongly influenced by the global financial crisis, says the Norwegian Minister of Finance, Ms Kristin Halvorsen.

2008 was a dramatic year, with equity markets nearly halving in value. This is reflected in the Fund’s return, which last year ended up at -23.3 per cent (measured in international currency terms).

The Norwegian krone value of the Fund rose from NOK 2 019 billion to NOK 2 275 billion. High petroleum revenues and a weaker krone contributed positively, by NOK 384 billion and NOK 506 billion respectively, while investment returns reduced the Fund’s value by NOK 633 billion.

- The investment returns are very poor, but within the possible range that was assumed when the investment strategy was established. The Fund’s investment strategy is long-term, robust and well-understood by the stakeholders. Investments are made on the basis on what is best for the Fund in the long run, and recent developments have not lead us to review the strategy, says Ms Halvorsen.

The Fund has a high risk bearing capacity and long time horizon. A well-diversified investor with a robust investment strategy typically gets well paid for assuming investment risk during periods of market unrest and high risk premia. The equity allocation has increased from 40 to 50 per cent, and will continue to rise to 60 per cent, in accordance with the decision made in 2007. The Fund’s average ownership share in international equity markets has risen to nearly 0.8 per cent, providing a corresponding rise in the claim to future profits in listed companies worldwide.

The financial crisis has also proved challenging for Norges Bank’s active management. After nine years of outperforming the benchmark, Norges Bank’s underperformance in 2007 and 2008 has dominated the accumulated results. The results in 2008 are not satisfactory.

Norges Bank reports that the financial crisis proved challenging for its risk management system and revealed weaknesses in the implementation of its investment strategy. The Bank has at the same time implemented measures to address the weaknesses.

The Ministry will present to Parliament before Easter its annual white paper on the management of the Pension Fund. The white paper will contain an assessment of the Fund’s results, its investment strategy, and the so-called ethical guidelines associated with the Fund’s role as a responsible investor.

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APPENDIX: Background information on the Government Pension Fund

The Government Pension Fund was established by Act in 2006 to support a long-term management of petroleum revenues and facilitate the government’s accumulation of financial assets in order to help cope with large, future financial commitments associated with an ageing population. The Fund consists of the Government Pension Fund – Global (formerly known as the Petroleum Fund, established in 1990) and the Government Pension Fund – Norway (formerly known as Folketrygdfondet, established in 1967).

The inflow of the Pension Fund – Global (PFG) consists of all state petroleum revenues, net financial transactions related to petroleum activities, as well as the return on the PFG’s investments. The outflow from the Fund is the sum needed to cover the non-oil budget deficit. The PFG is thus fully integrated with the state budget and net allocations to the fund reflect the total budget surplus (including petroleum revenues). Fiscal policy, which regulates the outflow from the fund, is anchored in a guideline where the structural, non-oil budget deficit shall over time correspond to the real return on the PFG, estimated at four percent.

The Pension Fund – Norway (PFN) originates primarily from surpluses in the national insurance accounts until the late 1970s. The return on the assets is added to the fund, and there are no transfers between the PFN and the fiscal budget.

The governance structure of the Government Pension Fund is marked by a clear division of responsibilities between the political authorities and the operational management. 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 Fund (which includes setting a benchmark and risk limits), establishes the Fund’s ethical and corporate governance principles, and exercises oversight over the operational management. Within these limits, there is full delegation of operational management to Norges Bank and Folketrygdfondet, which have been charged with the operational management of the PFG and the PFN, respectively. Of the Pension Fund capital on 31 December 2009 of NOK 2 364 billion (around USD 340 billion), NOK 2 275 billion was attributed to the PFG and NOK 88 billion to the PFN.

The Pension Fund has a long investment horizon and a very diversified investment strategy. The Fund is invested globally in a large number of financial instruments in order to get a broad diversification and achieve good investment returns with moderate financial risk. The Fund is managed with a view to maximizing return, given a moderate level of risk. This enables future generations to benefit from the savings as well. At the same time, the Fund as an investor shares responsibility 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 management of the Fund is subject to a high degree of transparency. The Storting is informed of the investment framework and the Ministry’s oversight through an annual white paper each spring, and the operational managers Norges Bank and the Folketrygdfondet also report publicly on a regular basis.

More information on the Fund is available on the internet at www.government.no/gpf.