Norwegian panel proposes new fund to fight shortfall

By Sophy Fearnley-Whittingstall

OSLO — A government-appointed commission in Norway has proposed creating a new Government Pension Fund, combining the country's two main public funds, as part of a package of reforms to address a potential pension funding shortfall.

The new fund would combine the existing Government Petroleum Fund, worth 850 billion Norwegian krone ($122 billion) at year-end 2003, and the National Insurance Fund, valued at 148.3 billion krone at the end of the first half of 2003.

Since 1990, Norway, the world's third-largest oil exporter, has invested surplus oil revenue overseas, anticipating the twin challenges of declining petroleum stocks and an aging population.

The present ratio of 2.6 members of the labor force per retiree is forecast to decrease to 1.6 by 2050, the commission said. Without reform, overall pension spending is seen more than doubling, to 19.7% of gross domestic product by 2050 from 9.1% in 2001. The proposals are expected to reduce that by 20%.

"The advantage (of the reform package) is to make the public economy more resistant to the aging challenge and make the new pension system more sustainable," said Sigbjoern Johnsen, a former finance minister and head of the cross-party panel.

The new fund should reflect developments in both petroleum revenues and pension obligations, rather than being based solely on actuarial considerations, the panel recommended. The commission proposed setting long-term fiscal policy guidelines so that the proportion of unfunded pension debt remains stable in years to come. If the guidelines weren't met, under the proposal, the government would have to take special budgetary measures to restore the balance. "Before, there was no connection between the fund(s) and pension debts at all," said Bjorn Halvorsen, director, Ministry of Social Affairs.

Rather than establish a new fund management organization, the existing dual structure would be maintained in the new fund. The National Insurance Fund's remit is to invest domestically, while the Petroleum Fund, under the auspices of the central bank, invests all of its assets abroad.

"We don't think this will change the way we manage investments. The two parts of the fund will be managed separately in the same way as today," said Knut Kjaer, executive director, Norges Bank, Oslo. The petroleum fund now has 50 different mandates with 30 international managers, he said.

"We are not proposing any change in the rules of distribution or allocation," Mr. Johnsen said. "It's more a change of perception." However the report does call for more detailed rules on asset allocation between domestic and overseas investments, taking monetary policy into account.

"The idea is that it should be one fund, but the investment mix will look the same as in the single funds," said Jimmy Johansen, consultant at Mercer Investment Consulting, Oslo. The fund would benefit from combining expertise from the two different units, he said.

The fund's larger size could also provide more clout in the marketplace. "The Petroleum Fund has the power to negotiate the best deal in the market, but the merged fund could have even better negotiating power," Mr. Johansen said.

And, while the fund could be expected to continue to be free in its choice of investments, Mr. Johansen said there was likely to be greater demand for ethical investments.

Although the National Insurance Fund would continue to be financed on a pay-as-you-go basis, the commission discussed introducing a defined contribution element, but this was not approved by a majority.

Because oil revenue could only cover a small share of the anticipated increase in pension payments, the report also recommended financial incentives to defer retirement until the age of 70. Under the current system, the standard retirement age is 67. The new proposals also would allow anyone to take a much-reduced pension at the age of 62.

Without sufficient incentives to work longer, the new proposal could backfire as it would actually make it easier for people to take early retirement, albeit less financially rewarding, Mr. Johansen said. "The ideas behind the initiatives are good, but there are gray areas which need to be filled."

Other proposals included a closer link between a person's income and the size of retirement benefits; a minimum guaranteed pension; and that unpaid people who care for children, the sick, disabled or elderly should still earn state pension benefits. The report also suggested replacing the current wage-index link with one based on the mean of wages and inflation.

The commission rejected mandatory minimum requirements for occupational pension schemes, but said it expected such pension plans to continue to play an important role. The trickle-down impact of the reforms could make occupational schemes more flexible about retirement age, allowing people to retire fully at 62 in line with the state pension, Mr. Johansen said.

After almost three years' work, the commission expects Norway's pension reforms to take effect from 2010. The proposals are now under public discussion before new legislation can be formulated. The government plans to put the proposals before Parliament in the fall, but there is no formal timetable for introducing legislation. "Most political parties were represented in the commission so there is already broad political agreement," said Mr. Halvorsen.