Staff at Norway's NOK2.7trn (US$452.2bn) Government Pension Fund Global must be breathing a sigh of relief as the Ministry of Finance took a slightly lighter touch when restricting its investments than had been feared.
After the sovereign wealth fund posted dismal 2008 returns, the Ministry threatened to ban the use of active management within the fund, saying it added too much risk to the portfolio – the fact that 2008 was followed by the best returns in the fund’s history is no matter. The suggestion led Norges Bank Investment Management (which manages the fund’s assets) executive board chairman Svein Gjedrem and executive director Yngve Slyngstad to ferociously defend the use of active management.
The Ministry stopped short of a ban, but reduced the amount of active risk the scheme can take and limited the type of leverage that can be incorporated, among other changes. And it has yet to answer the question of what kind of benchmarks the scheme will use going forward – whether exotic beta will be used to replicate some active strategies. (See news story)
NBIM has remained tight lipped since the Ministry’s proposal, but as one of the world’s largest sovereign wealth funds, and a bellwether in the industry, investors will undoubtedly be keeping an eye on the Norweigian fund’s reaction.
The UK pension industry meanwhile, is dealing with a government-driven paradigm shift of its own. This month’s country focus evaluates the success of the Pension Protection Fund, which turns five this year, and the fourth anniversary of A-Day, which was meant to herald in pension simplification. Reforms did not stop there. A new system for personal accounts, NEST, will be going live in 2012.
The UK government has a spotted history with pension reform. The PPF, despite its flaws surrounding levies and questions about solvency, was widely regarded as a successful way to secure pensions.
A-day, on the other hand, left some thinking the term “pension simplification” is a contradiction in terms. As a result, one asset manager said to me he shudders at the thought of a government hand on pensions.
Given the history, industry watchers are rightfully cautious about the 2012 pension reforms, with nay-sayers claiming the contribution rate won’t be enough to provide for retirement.
I applaud the UK government’s effort to ensure retirement security for lower earners, though only time will tell whether their intentions culminate into success.
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