Early this year a new law came into force in Norway, establishing more flexibility for the creation of defined contribution (DC) plans. Under the law, passed in January, DC schemes became a real alternative to Norway’s traditional defined benefit (DB) occupational schemes.
The new DC schemes can be established by an insurance company, a pension fund, a bank or a fund management company. The law contemplates the possibility of having separate accounts in a unit-linked company or mutual fund giving employees the opportunity to choose different investment profiles, following the line of the Swedish PPM system, but without being compulsory.
But so far the system has not yet taken off, and many fund providers have not even moved into the new market.
“The first players have moved in offering their products but many managers, including Skandia, haven’t done it as yet,” says Asmund Paulsen, managing director at Skandia Asset Management in Oslo. “We didn’t want to rush into it because there are some aspects that still remain to be clarified.”
To some extent the marketing has started and this year’s expected growth will be probably seen next year. “Technically speaking the law itself is there, and for those wishing to do so the possibility of establishing a defined contribution scheme is there too. But some aspects – to do for instance with transition from DB to DC plans – are still not clear.”
Lack of specific details regarding the creation of the new schemes and, most importantly, insufficient fiscal incentives to promote this type of plan have slowed down the whole process
At Wassum Investment Consulting in Bergen, partner Tor Sydnes comments: “The intention of the new law was to boost the DC system in Norway but the government has failed to provide a favourable taxation framework. So far we haven’t seen the growth forecast at the end of last year.”
So we haven’t seen more assets in the pension fund industry, but on the investment side things have been more interesting. Some pension funds and insurance companies have reached quite extreme situations. Falling share prices have positioned them well bellow minimum required levels, this forcing some to sell. “Some of them have to make decisions that financially don’t necessarily make much sense, but legally or technically they are forced to do so.”
“We have also seen very interesting individual cases such as that of a pension fund that lost a lot of money even though they were using guarantee products and this case is now under investigation,” Paulsen says. “Cases like this one can easily frighten people in the industry.”
Apart from extreme cases, the typical asset allocation has changed and, whereas before the exposure to equities was around 30%, it is now more in the region of 20%. “The equity exposure has been decreased, and although there is some interest in hedge and venture funds, the only real winner in the Norwegian market during the last months has been short duration fixed income investments, “ says Paulsen.
However, the decrease in exposure to equities haven’t stopped the internationalisation of this part of the portfolios. “Norwegian institutions have moved much faster into international equities than their Swedish counterparts and this trend has not really been affected by fallen markets, “ he says.
The internationalisation of the portfolios has helped foreign managers to enter a market that is becoming more professional and less concentrated.
“Asset management in Norway is becoming an industry as such,” says Ole Henrik Eide, CEO at Nordika Asset Management in Oslo. “There is more regulation and supervision which is forcing all the different investment houses to be more professional. There are more companies coming into this market to track and monitor our performance and that is improving the quality of asset management being provided in Norway.”
Although Nordic asset managers, both Norwegian and other Scandinavian houses, still dominate the market, the trend towards a more global approach to investments is benefiting international asset managers that have been welcomed by investors willing to hire their services. However, the market is still very limited, and although it has high potential for growth, the next few months are expected to be quiet, at least in the pensions area.
At present, the hottest issue in the institutional business is without doubt the possible merger between the pension fund for municipal workers Kommunal Landspensjonskasse (KLP) and the pay-as-you-go retirement system for civil servants, Statens Pensjionskasse (SPK). The merger of KLP, which has assets of NKr90bn (e11.1bn), and SPK could result in the creation of Norway’s largest life pensions company. Even though the operation hasn’t been finalised and it might take years until the process in completed, the giant public service fund would have around 1.34m eligible members out of a total population of 4.5m.
KLP is a non-funded scheme, with most of its assets managed in-house and only a small proportion outsourced to external managers. The question now is if as result of this merger KLP will have to externalise a larger portion of its assets. If this is the case, the amount of new assets to be managed in the institutional market will increase considerably, so both local and foreign investment houses are closely following developments.
“If the merger goes ahead and KLP has to externalise its obligations this would mean a very important boost for the market,” says Wassum’s Sydnes.
“The KLP issue is something that, if it happens, will be in the long term and not in the next year or so,” says Paulsen. “In the months to come, I think the most important cash flows will came from the municipalities that are still selling their stakes in utilities and reallocating these funds into bonds and equities.”
At Wassum, Sydnes comments: “The trend among municipalities selling their utilities holdings has been going on for a while but it is a process that hasn’t been finished as yet. Basically what they want is to invest money without losing liquidity, and the regulators have decided they have to use external expertise to make investment decisions”
“We are advising them on how to decide their investment approach and strategic asset allocation, so they can find the best way to managed their short-term liquidity and long-term investments.”
This has obviously helped to make more common the use of consultants, in a country where there is no tradition of hiring this type of service. “In Norway the role of consultants has been more limited and less significant than in other European countries,” he says.
At Nordika Asset Management, Eide says: “As the market gets more professional and sophisticated, we will see more players providing advice to institutions. Pension funds are hiring consultants to do ALM studies and the investment consulting will also grow.”
As the regulation for the Norwegian DC system is on the table and some providers have already developed to meet the requirements of this segment of the market, assets will eventually go into the system. However, no one expects a real boom in Norway’s pension market, but a small and continuous process.“The new DC schemes will probably unfold next year but we won’t see the same growth pattern that we have seen in Sweden,” says Skandia’s Paulsen.

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