NORWAY - The Norwegian Ministry of Finance said today it planned to limit the amount of tracking error the Government Pension Fund Global can introduce to the scheme through active management as it moves towards decreasing risk in the fund.
In a white paper presented to parliament today, minister of finance Sigbjørn Johnsen (pictured) said the tracking error introduced by active management should decrease to 1.0 percentage point from 1.5 percentage points. The white paper said there will be room for deviations "in exceptional circumstances".
"In our opinion there still ought to be some leeway for the fund to deviate from its benchmark portfolio. The costs involved in closely replicating the benchmark portfolio are unnecessarily high. Moreover, the fund's characteristics create a potential for excess returns that should be exploited to some extent," Johnsen said.
"There will still be scope for active management," director general for the Ministry of Finance Martin Skancke told GP.
The Ministry also took steps to reduce risk by eliminating the use of leverage only if it introduces risk to the portfolio.
Skancke said the Ministry will not put an absolute limit on the level of leverage used within the portfolio. He said: "We're not proposing a quantitative limit on leverage. This is a qualitative limit."
He said the ultimate amount of leverage the scheme takes on will be determined by the Norges Bank, the country's central bank. Officials at the bank declined to comment.
The Ministry has spent over a year evaluating the use of active management within the portfolio. The inquiry was spurred when the sovereign wealth fund posted its worst results in history in 2008.
In January, the ministry held a seminar to discuss reports by Mercer; and Andrew Ang, a professor at the Columbia Business School in the US, Stephen Schaefer, from the London Business School and William N. Goetzmann, from the Yale School of Management about the use of active management. (Global Pensions; January 18, 2009)
The professor's report suggested the losses suffered from active management in 2008 and early 2009 by Norges bank Investment Management, which manages the pension fund's assets, were due to "systematic factors which fared very poorly during the financial crisis".
Johnsen said the Ministry will evaluate whether the portfolio benchmark should include system risk factors beyond market risk in a report next year.
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Caroline Rookes CBE and Michele Hirons-Wood have joined The Pension Superfund's board of trustees to focus on maintaining governance standards and safeguarding member benefits.
The first specialist independent firm advising pension schemes on bulk annuities or moving to a consolidator has been set up with ambitions to shake up the market.