The management of the Government Pension Fund Global

A commentary article by chair of the Commission, Svein Gjedrem.

The Commission on the Act relating to Norges Bank and the Monetary System submitted its Report to the Minister of Finance, Siv Jensen, 23 June. The Commission’s proposals include the separation of the Government Pension Fund Global (GPFG) from Norges Bank.

The Commission has sought to be forward-looking and has considered how the central bank and the Fund should be organised in the light of its current insight into central banking and investment management.

Both activities place greater demands on the board, management and organisation today than was the case earlier. Central banking and investment management are also quite different in nature. While monetary policy is a government task, investment management is an activity aimed at safeguarding and increasing the value of the Fund in competition with other operators in the capital and real estate markets in other countries. The scope of the tasks facing Norges Bank’s board and management is substantial.

The management of the GPFG has become considerably more extensive and demanding than expected when this task was first assigned to Norges Bank. The size of the Fund has increased substantially and is of considerable importance for the Norwegian economy and the welfare state. The Fund is now of a size equivalent to more than twice annual national income. The expected annual return is on a par with the gross product of Norway’s manufacturing industry as a whole, and accrues to the state. Around every seventh Norwegian krone that is spent via government budgets in 2017 will be drawn from the expected return on the GPFG, without drawing down on the principal. If the capital saved is spent or returns fall short, direct and indirect taxes will have to be increased over time and public benefits reduced.

The Commission proposes the establishment of a separate statutory entity to manage the Fund, demerged from Norges Bank. Its task will be to generate returns and meet defined objectives. Having a board and organisation with a sole focus on investment management will be an asset, and the professional competence of the board can be more easily tailored to the task at hand. This organisational structure will facilitate the further development of the Fund.

The board and management shall be accountable for its actions as is the case today. It is important to maintain the credibility and legitimacy of investment management that the Fund has earned while under the central bank. The entity shall have a government-appointed board. The Ministry of Finance shall, as is the case today, define the mandate for investment management pursuant to the Government Pension Fund Act. The Commission assumes that important changes to the mandate will continue to require the endorsement of the Storting (Norwegian parliament). The Ministry of Finance shall oversee the board’s decisions and compliance with the investment mandate. The entity shall report to the Ministry and the Ministry reports on investment management to the Storting.

In the Commission’s view, the main risk associated with the proposed changes is that the model for the GPFG is compromised. The Commission cautions against dividing the Fund into different entities, as this would entail higher costs and place greater demands on the board. Nor would it be meaningful to create competition between government-owned investment funds. A division would only lead to higher costs.

A separation must not influence the Fund in other respects. The Fund is not, and must not become, an instrument of foreign policy, business policy, regional policy or environmental policy. Public funds for these purposes should be allocated via the central government budget and be subject to the criteria for prioritisation, realistic budgeting and transparency that follow thereof. The Fund must not become a government budget number two for purposes that are not prioritised in the annual budget process.

The Fund’s important role in overall economic policy must therefore be safeguarded. We propose that the Government Pension Fund Act strengthens the emphasis on the Fund’s function as a source of financing of the welfare state across generations. The requirement of the highest possible return at an acceptable and carefully weighed risk level is thus of particular importance. The Fund must be a responsible investor. The Commission further proposes that the current practice of investing the Fund abroad be established by law. This is necessary in order to avoid the Fund becoming a budget number two. Investing the Fund abroad reflects the Fund’s role as a savings fund for the nation.

It is important to settle the issue of organisational model so that the board, management and staff can work under a stable framework. Lingering uncertainty about the organisation would be a disadvantage and could affect performance.

The Commission has submitted a unanimous proposal. The matter is now for others to decide. We are hoping for an efficient decision-making process.