100 What do you know about pension funds as institution investors?

Pension funds are commonly run by some sort of financial intermediary for the company and its employees, although some larger corporations operate their pension funds in-house. Pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations. A public pension fund is one that is regulated under public sector law while a private pension fund is regulated under private sector law. In certain countries the distinction between public or government pension funds and private pension funds may be difficult to assess. In others, the distinction is made sharply in law, with very specific requirements for administration and investment. For example, local governmental bodies in the United States are subject to laws passed by the states in which those localities exist, and these laws include provisions such as defining classes of permitted investments and a minimum municipal obligation. Most pension plans offer a range of different investment funds that are designed to invest your money in different ways over the years until your retirement. Investment funds usually invest in a number of key categories of asset, including shares, bonds and cash. Probably be offered a choice both of funds that:

specialise in specific assets – eg a fund focusing on shares in European companies

invest in a mix of different assets – eg a fund investing in both global shares and government bonds

Most people choose to invest their pension in the second type of fund, because spreading – or diversifying – your investments between different types of asset is a good way of managing risk. You could also diversify your investments in this way yourself, by dividing your pension savings between a range of specialised funds. But this requires more time and financial knowledge.

PUBLIC PF INVEST STRATEGY: The development of the investment strategy of the GPFG is premised on seeking to maximise the international purchasing power of the fund assets, given a moderate level of risk. The strategy is based on assessments of expected return and risk in the long run and is derived from the purpose of the Fund, the special characteristics of the Fund, the comparative advantages of the asset manager, as well as assumptions regarding the functioning of the financial markets.

The investment strategy for the Government Pension Fund is expressed through the composition of the Fund’s strategic benchmark index, cf. figure above. The capital of the GPFG is in its entirety invested abroad in foreign currency. Fund investments are spread across several asset classes, namely equities, fixed income and real estate. The main portion of the assets of the GPFN is, on the other hand, invested in the Norwegian equity and fixed income markets. In this regard, there are important differences between the two parts of the Fund: the GPFN is a relatively large investor in a small capital market, while the GPFG is, in relative terms, a minor investor in large, international markets.

One must be prepared for significant variations in the value of the Government Pension Fund from one year to the next. The Fund is highly resilient to such volatility. One reason for this high risk-bearing capacity is the low probability of large withdrawals on short notice. Consequently, the investment strategy does not aim to minimise short-term fluctuations in the value of the Fund. A strategy with this objective would have produced a significantly lower expected return over time.