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Solvency proposal could cut into Norwegian fund returns

Norwegian occupational pension plans will be forced to reduce equity and alternatives allocations in 2018 should capital requirements under the Solvency II directive be extended to cover their activities.

That would require plans to reallocate those assets to low-yielding government bonds, since the rules impose higher amounts of reserve capital to be held against asset classes deemed as risky, industry sources said.

Insurers across Europe are already subject to Solvency II, and those offering retirement products are also caught in the capital requirements net. However, the Supervisory Authority of Norway, Finanstilsynet, proposed that all retirement arrangements be subject to the rules, which could be extended to occupational plans as soon as January 2018.

The Norwegian association of pensions, Pensjonskasseforeningen, and the plans it represents strongly oppose the application of the rules to retirement plans. They are concerned it will leave them at a disadvantage to other investors, which may be better able to bear the capital requirements, and to peers in other countries. Pensjonskasseforeningen said Norway will be the only country in Europe to penalize plans in this way.

According to sources, the extension will not only force pension funds to completely overhaul their allocations, but it also contradicts the European Union Institutions for Occupational Retirement Provisions directive, which states that retirement plans should not be subject to these Solvency II capital requirements.

Based on 2015 data from Pensjonskasseforeningen, occupational plans have a total of 30% of assets — about 90 billion Norwegian kroner ($10.6 billion) — invested in foreign and domestic equities. Based on the capital they would need to hold against these assets, they will need to reduce equity allocations to 15%, estimated Espen Klow, Oslo-based secretary general at the association.

Ole Petter Gjarde, CEO of the 18.4 billion Norwegian kroner Norsk Hydros Pensjonskasse, Oslo, said the regulation will cause a dramatic shift in the asset allocation of the fund, which has 40% of its assets in equities. Mr. Gjarde said 50% to 60% of the fund's return comes from equities. “We are fully funded and we are quite happy to take on the equity risk.”

Mr. Klow confirmed that many pension funds in Norway are in a similar situation to Norsk Hydros, and that all employees and employers are against it.

According to consultants working on Solvency II, the planned extension of the rules by Norwegian regulators has also limited asset owners' ability to invest in alternatives, despite the potential for higher returns in the sector.

Richard Tyszkiewicz, senior director at bfinance, in London, said: “One of our Norwegian clients just put a planned private debt investment on hold due to the uncertainty surrounding this debate.”

Sources said Norwegian pension funds will instead have to move into assets deemed as safer, such as government bonds. However, they warned it will be difficult since they offer lower yields and in some cases are trading in negative territory.

Equity strategies continued to be popular in 2016 with Norwegian institutional investors. Data from the Norwegian Fund and Asset Management Association show that equity strategies recorded 12.2 billion Norwegian kroner of net inflows in 2016, compared with 734 million kroner of net inflows in 2015. Money market funds had net inflows of 9.8 billion Norwegian kroner in 2016, bond funds had net inflows of 3.3 billion kroner and other fixed-income funds, 2.1 billion kroner.

A number of global money management firms running institutional assets in the Nordics were unavailable to comment on the impact of the rules on their business by press time.

Sources said they understand that the Norwegian Ministry of Finance will decide whether to extend the rules to occupational plans this spring. The Ministry of Finance did not respond to questions regarding the timeline and next stages of the process by press time.