The Success of the Government Pension Fund of Norway

Mon, 09/01/2014 - 16:08

The creation of the Mexican Oil Fund for Stabilization and Development was modeled after Norway’s Government Petroleum Fund, which was changed into the Government Pension Fund of Norway in January 2006. This fund comprises two entirely separate sovereign wealth funds owned by the government of Norway: the Government Pension Fund – Global (GPFG) and the Government Pension Fund – Norway (GPFN and formerly the National Insurance Scheme Fund). Despite its current name, the GPFG is not actually a pension fund, since it derives its financial backing from oil profits and pension contributers. It was created as the Petroleum Fund of Norway to administer the surplus wealth produced by Norwegian petroleum income. Despite its name change, it continues to be informally known as Oljefondet (Oil Fund). The GPFG is managed by Norges Bank under mandates set by the Ministry of Finance, which resembles the structure expected for the Mexican Oil Fund for Stabilization and Development, which is set to be managed by Mexico’s Central Bank under supervision from SHCP.

When oil was first discovered in the North Sea in 1969, Norway decided to treat oil and gas revenues under the same fiscal regulations as ordinary revenue. However, in 1990 the Government Petroleum Fund Act was passed in order to establish this trust fund and manage oil revenues under a different fiscal scheme and with more transparency. The original idea behind the creation of the fund was to counter the effects of a recent decline in government income and to smooth out the disrupting effects of highly fluctuating oil prices. It was mainly created as a fiscal policy tool to underpin long-term considerations in the phasing of petroleum revenues into the Norwegian economy. The fund’s main purpose today is to invest a percentage of the large surplus generated by the country’s petroleum sector – from taxes charged to companies, payments for exploration licenses, Norway’s Direct Financial Interest (a portfolio of the Norwegian government’s directly owned exploration and production licenses for petroleum and natural gas on the Norwegian continental shelf), and dividends from the country’s NOC, Statoil. In other words, all the government’s oil and gas-related income is amassed by the fund.

Norway’s GPFG is considered to be an instrument for general savings, so it has no clearly defined future liabilities. The capital from the fund is not earmarked for any specific purposes – and especially not for pensions. Its investment objective today lies in maximizing the fund capital with a moderate level of risk exposure. In December 2013, the Oljefondet was the world’s largest ‘pension fund’, with US$828.9 billion under management and holding 1% of global equity markets and 1.78% of European stocks. It produced a 13.4% return on investment during 2012. The average real rate of return on the GPFG from January 1997 to December 2012 has been 3.2% (net of inflation and management costs). The aggregate return on the GPFG’s investments since the initial capital contribution from 1996 was NOK1.087 trillion (US$178.8 billion net of management costs) at the end of 2012. This provides a good benchmark for the wealth that the Mexican Oil Fund for Stabilization and Development could create in the long-term.