Disagreement about the world’s biggest pension fund

Yngve Slyngstad and Øystein Olsen
Yngve Slyngstad, chief of the Norwegian Oil Fund (in the middle of the picture) believes, according to Dagens Næringsliv, that the fund should be taken out of Norges Bank. Governor of Norges Bank, Øystein Olsen, will hold the fund in the bank. Photo: flickr.com

24 October 2017 08:41

Disagreement about the world’s biggest pension fund

Who should manage Norway’s enormous oil wealth? Should Norway’s ‘Oil Fund’ be moved out of Norges Bank? Three NHH researchers outline possible solutions.

The Central Bank Commission, chaired by former Governor of Norges Bank Svein Gjedrem, proposes that responsibility for managing the Government Pension Fund - Global (the ‘Oil Fund’) should be transferred to a separate statutory entity.

‘The biggest risk of switching managers is that it could jeopardise the model for the Government Pension Fund - Global. I want to emphasise that the transfer must be carried out in an acceptable manner without affecting the rest of the framework for the Fund,’ Gjedrem said when he handed over the Commission’s report to the Minister of Finance.

karin thorburn
Karin S. Thorburn, Department of Finance, NHH.

Move the board out:

Professor of FinanceKarin S Thorburn of the Department of Finance and Centre for Corporate Finance believes that there are several good reasons for transferring management of the Fund to a separate statutory entity:

The Government Pension Fund - Global is now so big that it distracts the Bank’s Executive Board from the tasks it should be concentrating on. Transferring responsibility will mean that the Ministry of Finance can appoint a board for the new statutory entity that has both the expertise and the time it needs to exercise good control of the management of the Fund.

The transfer will also eliminate the risk of harm to Norges Bank’s reputation. The way the Fund is managed today exposes Norges Bank to a reputational risk that is unique in the international context. What if the Fund gets involved in a corruption scandal as a result of its investments? In such situations, there is a risk that Norges Bank’s reputation and relations with other countries will be negatively affected.

It is crucial that the transfer of responsibility for the Fund should be used to tighten the investment mandate and control of the Fund’s management. It is very important that the Ministry of Finance, through this separate statutory entity, addresses the risk of the Fund’s management being steered more in the direction of active management. It must act as a doorstop in relation to the pressure from active management circles and it must ensure that index management does not conceal wagers against the market.

Associate Professor Torfinn Harding, Department of Economics, NHH.

A separate board within Norges Bank:

Associate Professor Torfinn Hardingof the Department of Economics is sceptical about radically changing the management of the Government Pension Fund - Global. He supports Alternative B: No divorce, but a separate board for the Fund:

‘The people’s trust’ and ‘index-based management’ are keywords behind the success of Norges Bank’s management of the Government Pension Fund - Global.

The development of the Fund is a political feat of historical and international dimensions that has been made possible by visionary and responsible bureaucrats, politicians and voters. Will a completely new organisation be able to win the necessary trust of the people quickly enough? For 200 years, Norges Bank has depended on building trust in its payment systems, monetary policy and asset management. The financial crisis demonstrated the trust that has been established. Despite large falls in value, it proved to be politically unproblematic to maintain a rational investment strategy.

Leading financial economists point out that the success of the Fund’s management is primarily down to the reference index set by the Ministry of Finance and to how Norges Bank has implemented it in a capable and cost-efficient manner. Norges Bank has been criticised, however, for making speculative wagers to a certain extent. What will happen to the proportion of speculative wagers if the demerger takes place?  Will the new institution be more powerful and put pressure on its client to ensure it is given greater leeway to make speculative wagers?

Why take the chance of changing something that works as well as the management of the Government Pension Fund - Global? Having two boards in Norges Bank, as in the Commission’s Alternative B, is probably a big enough step at the present time.

Gernot Doppelhofer
Professor Gernot Doppelhofer, Department of Economics, NHH.

A separate board within Norges Bank:

Professor of Macroeconomics Gernot P Doppelhofer of the Department of Economicsalso supports a compromise in which  the Government Pension Fund - Global remains under the auspices of Norges Bank, but with a separate board:

I believe that a solution whereby the Government Pension Fund - Global has a separate board – but is still under the auspices of Norges Bank – is a good compromise. Norges Bank has shown that it can ensure price stability and financial stability. Given the size of the Government Pension Fund - Global, it is a good idea to keep the Fund within Norges Bank, but to reduce the burden on the current Executive Board by having a separate governing body chaired by the Governor of Norges Bank with the Deputy Governor as the deputy chair.

As regards the question of the risk that lies in demerging the Fund from Norges Bank, I believe that including the Governor and Deputy Governor in a separate board for the Government Pension Fund - Global will better secure the the Fund’s place in Norges Bank than having a completely independent board. I believe it is desirable to implement a less radical adaptation of the governance of the Fund than an independent board would entail.

the Norwegian oil fund:

In May the Norwegian Oil Fund passed 8 000 billion NOK. It has never been bigger. The Government Pension Fund Global, also known as the Oil Fund, was established in 1990. The formal framework for the fund has been laid down by the Norwegian parliament. The Ministry of Finance has the overall responsibility for the fund’s management.

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