What it means
When Norway began earning large revenues from North Sea oil and gas, it chose not to spend all the money at once. Instead, the state saves a large share of the income in a fund that invests in global shares, bonds, property and renewable energy infrastructure.
The fund is owned by the Norwegian people through the Ministry of Finance. The fund is run day to day by an investment management arm of the central bank, Norges Bank, which follows a mandate set by the Ministry of Finance.
The mandate lays out a benchmark, limits on risk and ethical guidelines. Companies can be excluded from the fund when they breach those guidelines, and the decisions are published.
A central feature is a fiscal rule. The government may use in its budget only an amount that equals the fund's expected real return, and the rate used is a set percentage that the government reviews from time to time.
This means the capital is meant to stay intact while only the expected return is used to help balance the budget. Because the fund invests abroad, it also protects the Norwegian economy from being overwhelmed by oil money coming in.
If every oil dollar were spent at home, prices and wages would rise rapidly and other industries would struggle. By saving the money overseas, Norway keeps its currency and economy steadier.
For readers outside Norway, the fund is a useful case study in good governance. It publishes holdings, returns and costs, it is managed at arm's length from politicians and it has a clear rule about spending, which are the features that most other resource-rich countries find hardest to copy.
Size brings its own challenge. A fund this large owns a small slice of most listed companies in the world, so it cannot easily buy or sell without moving prices and it has to be patient about how it trades.
It also has to be careful about its influence as an owner, which is why it publishes how it votes at company meetings.
In practice
Real-world examples.
Example
A fund manager in Asia reviews the holdings of the Norwegian fund, which are published, and learns that it owns a small stake in thousands of companies worldwide. The manager uses the data to compare her own portfolio's sector weights against a very broad benchmark.
Example
A mining company is excluded from the fund after a review of its environmental record. Its share price dips on the news, and its finance director must explain to lenders why the exclusion could affect the cost of future borrowing.
Example
A government adviser in another resource-rich country studies the fiscal rule used in Norway. She proposes a similar rule for her own country, so that only the expected return, not the capital, can be spent in the annual budget.
Formula
Calculation
Maximum budget use = Fund value x Expected real return rate
Suppose the fund is worth $1,200,000,000,000 and the fiscal rule assumes an expected real return of 3%. Maximum budget use = 1,200,000,000,000 x 0.03 = $36,000,000,000. If the government withdraws exactly this amount and the fund actually earns a real 3% that year, the fund's real value stays at $1,200,000,000,000 after the withdrawal, because the return of $36,000,000,000 is replaced by the amount taken out.Case study
Seen in the real world.
The Kingdom of Aldersund is an illustrative, fictional country that discovered offshore gas fields. Its finance minister visited Norway to study how the Government Pension Fund worked and returned with a plan to build a copy.
Aldersund's new fund received $10,000,000,000 in its first year. The law said the government could take out no more than 3% of the fund's value each year, so in the second year the maximum draw was 3% of roughly $10,400,000,000, or $312,000,000.
The opposition wanted to spend more, but the rule held, and by the end of the illustrative decade the fund was large enough to cover a growing share of pension costs. The story shows how a simple written rule protects savings from short-term political pressure. A decade on, a drop in oil prices cut the government's income sharply, yet the 3% rule meant the budget grew steadily instead of swinging up and down. The finance minister said the rule had paid for itself in calmer planning.
Watch out
Common mistakes.
- Thinking the fund pays Norwegian pensions directly, when the name reflects a long-term savings purpose and the money helps balance the state budget rather than paying individual pensions.
- Assuming the government can spend any amount it likes, when a fiscal rule limits use to the expected real return.
- Believing the fund invests in Norway, when its investments are almost entirely outside the country.
Questions
People also ask.
Why is it called a pension fund?
The name signals that the money is saved to meet future needs, including the rising cost of pensions as the population ages.
Who manages the investments?
An investment management division of Norway's central bank manages them under a mandate from the Ministry of Finance.
Is the fund the same as the Norwegian state pension?
No, the state pension is a separate benefit paid through the social security system, and the fund is a general savings pool owned by the state.
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