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Norway Pension Fund

Norway's Pension Fund Hits $1 Trillion

Oil Revenue and Smart Investments Produce Massive Returns
posted onSeptember 19, 2017
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Norway's Pension Fund

Norway’s pension fund has hit $1 trillion for the first time. The valuation makes it the biggest wealth fund in the world.

The Scandinavian country has become renowned for its ability to manage its wealth resources. To put the size of the fund into context, it is now the size of the GDP of Mexico.

The source of the funds' success lies in the country’s oil reserves. Oil began to be extracted from the North Sea shelf in the 1960s. The vast amount of oil and gas reserves which exist off the Norwegian coast has proven a stable source of income for ever since.

Statoil

Norway, a social democratic country, embarked on a new departure for managing petroleum reserves. In 1972, the government established Statoil. As a state-owned company, the profits generated by oil and gas sales were given back to the Norwegian people. In 2001, Statoil became a public company. However, Norway’s government still holds a majority share.

At a time when most western countries are attempting to pay off their national debt, Norway’s success is remarkable. In effect, they have guaranteed a stable future for generations to come by preserving the revenues from oil production.

Western Countries

This is in stark contrast to the management of natural resources by other countries. One example is Ireland. At a similar time to the North Sea discoveries, oil and gas reserves were also uncovered off the west coast of Ireland. For a period, the Irish government established a similar system to Norway. However, after a change in policy, Ireland reduced the tax it imposed on energy companies. Today oil and gas revenue amounts to a very small amount of its GDP.

Norway shares its North Sea shelf with Britain. For many years, the British portion of the shelf produced a far greater amount of resources. Despite this level of extraction, the British government did not preserve the money raised by oil and gas. The only areas which have attempted to match Norway’s success have been Alaska and Alberta. Both regions have considerably large reserves. Each area has established investment funds for their residents. However, neither has come close to matching the value of Norway.

Pension Fund Norway
Norway Pension Fund Growth /Source:Bloomberg

Investments

The size of Norway’s fund has turned into a global powerhouse of investment. It currently owns $667 billion worth of shares in over 9,000 companies globally. It also has a significant property portfolio, owning real estate in some of the most desirable addresses in the world.

Supported by the petroleum revenue, the Norwegian fund has also made intuitive investments. This bourn out by the statistics. In 2016, the return on investments was 6.9%.

The success of Norway’s pension fund is not without its problems. The size of the fund makes it difficult for it to find markets in which to invest. Entering into new investment areas such as infrastructure can be risky. Given the size of the fund, any potential returns may be insignificant.

Norway is also aware of the effect of falling oil and gas prices globally. The world is attempting to move away from a reliance on fossil fuel and toward green energy. The revenue from petroleum may have passed its peak.

Nonetheless, the success of Norway’s pension fund and their management on natural resources is nothing short of remarkable. Most western countries are witnessing aging populations. As a result, tax increases and a higher retirement age will become normal. Norway is unlikely to face these problems as their pension fund investments will see a steady income supply for generations.