Sound and responsible management of the Government Pension Fund

The Government is today submitting to Parliament its 2018 white paper on the Government Pension Fund. The paper is about the management of the Government Pension Fund Global (GPFG) and the Government Pension Fund Norway (GPFN). Norges Bank and Folketrygdfondet manage the respective funds under mandates set out by the Ministry of Finance. The investment strategy and the Fund’s performance are presented in the white paper. Further development of the investment strategy and the work on responsible management are also discussed.

Review of Norges Bank’s management
The Ministry of Finance presents a new review of Norges Bank’s management of the GPFG. A broad set of external analyses and assessments have been conducted, including by an expert group. The review is done every fourth year and contributes to transparency and insight into the management.

Central to the review are the analyses and assessments of Norges Bank’s deviations from the benchmark index, or active management. A feature of the GPFG is that investments are close to the benchmark index determined by the Ministry of Finance. Less than one percent of the variation in the fund’s returns can be attributed to Norges Bank’s active management. However, there are good reasons why the fund should not be managed entirely in line with the benchmark index. This has to do with excess return and cost effectiveness, among other things. The fund has advantages that can be used to seek higher returns than the benchmark index.

"Good returns on our joint savings will be important for long term public finances. This year’s review shows that Norges Bank has generated significant values", says Siv Jensen, Minister of Finance.

The expert group quantifies the contributions from active management from January 1998 to June 2017 to between NOK 75 and 112 billion, depending on how much of the management costs that are deducted. As an illustration, this implies a contribution to the financing of public expenditure over the state budget of about 2-3 billion NOK annually, measured by the expected real return of the fiscal rule.

The review also shows that excess returns have varied between stocks and bonds and between the individual strategies used by Norges Bank in its management. The Ministry of Finance emphasises total performance over time. The Executive Board of Norges Bank is responsible for the organization of the bank’s management and the strategies used.

The Government plans to maintain the limit on deviations from the benchmark index at today’s level.

New investment areas in GPFG
In the last two white papers on the Government Pension Fund, the Ministry of Finance has assessed investments in unlisted infrastructure. The Government’s assessment was not to open for such investments at this time. The Parliament’s Standing Committee on Finance and Economic Affairs endorsed this conclusion, but pointed out circumstances that could warrant a new review in the near future.

"In the white paper we state that we will assess whether unlisted renewable energy infrastructure should be included in the environment-related mandates, thus following up the remarks of the Standing Committee on Finance and Economic Affairs. The assessment will be based on the same requirements for transparency, return and risk that apply to other investments in the fund", says Siv Jensen, Minister of Finance.

The Ministry of Finance will also review the regulation of the environment-related mandates, including their scope.

The government has also assessed whether the GPFG should be invested in unlisted equities. This could provide Norges Bank with additional investment opportunities. At the same time, unlisted equity investments would challenge the management model based on transparency, low management costs, and a limited degree of active management. Based on an overall assessment, The Government does not propose to open the GPFG for investments in unlisted equities on a general basis. The current mandate gives Norges Bank an opportunity to invest in unlisted companies whose board has expressed an intention to seek listing in the public space.

Responsible management
The Government Pension Fund shall be a responsible investor. Both Norges Bank and Folketrygdfondet are among the leading international investors in their areas. There is a broad political support for the framework for responsible management and the Guidelines for observation and exclusion from the GPFG.

In the last year, work on responsible management has been strengthened further. Both Norges Bank and Folketrygdfondet are working to follow up the recommendations from an international working group on climate change reporting (TCFD). Furthermore, Norges Bank has presented two new expectation documents, on tax and transparency and on anti-corruption.

Ongoing initiatives
The white paper lists several relevant issues for the GPFG that the Ministry of Finance will return to later:

• Implementation of the increase in the equity share to 70 percent
• An assessment of the benchmark index for bonds
• Management organisation (the Gjedrem Commission)
• Investments in energy stocks

Key figures Government pension fund

	GPFG	GPFN
Market value at the end of 2017
Market value	8,484bn NOK	240bn NOK
Equity share	66.6 pct.	64.5 pct.
Fixed income share	30.8 pct.	35.5 pct.
Unlisted real   estate share	2.6 pct.	-
Performance 2017
Total Return	13.7 pct.	13.2 pct.
Return equity	19.4 pct.	19.3 pct.
Return fixed income	3.1 pct.	3.6 pct.
Return unlisted   real estate	7.5 pct.	-
Total excess   return	0.7 pct.	0.5 pct.
Management costs	0.06 pct.	0.07 pct.
Management costs in Norwegian kroner	4,728 mill. NOK	166 mill. NOK
Real return since 1998	4.2 pct.	5.3 pct.
Risk at the end of 2017
Expected tracking error	0.33 percentage points	0.49 percentage   points
Standard deviation	920bn NOK	18bn NOK