The €27.5bn Norwegian life and pension insurance company Vital, for example, is planning to make changes to its asset allocation. The fund is also preparing to make its first allocation to infrastructure.

“Although we haven’t got any aggressive plans to increase our allocations we will definitely invest more in private equity, hedge funds and emerging markets. But we are still not sure how the new regulations will look,” says Øystein Stephansen, chief financial officer at Vital.

Current regulations

Norwegian regulations currently only allow a maximum allocation of 5 per cent to private equity, hedge funds, infrastructure and emerging market stocks.

Vital currently has 1 per cent allocated to hedge funds and about 2 per cent to private equity and emerging market equities respectively. The €4.5bn Oslo Pensionsjonsforsikring (OPF) is also making preparations. Finance director Kjetil Houg says: “We are in the process of increasing our private equity and hedge fund allocation. We reduced our hedge fund allocation from 5.5 to 3.3 per cent this year, but we will take on other investments.”

The new regulations will also open the door for new investment opportunities. Vital, for example, is planning to make its first foray into infrastructure. “We have looked at infrastructure investments for a while and aim to take on the asset class when the regulations come into force – via international indirect plays,” says Vital’s Mr Stephansen.

Property funds are likely to be regulated along the same lines as direct property investments, which will have an upper limit of 15 per cent of assets. “Less stringent rules will open up the possibility for new investments, such as the possibility to invest more in property, in particular property funds. It has been difficult for smaller pension funds to take on property under the current framework,” says Rolf Skomsvold, general secretary of the Norwegian Pension Fund Association.

Kredittillsynet, the Financial Supervisory Authority of Norway, drafted the new regulations last year, which have since been referred to the market for consideration.

The industry has by and large welcomed Kredittillsynet’s proposals, in particular the removal of the cap on equities and bonds which limits corporate bond allocations to 30 per cent and allocations to equities to 35 per cent.

The industry has, however, been critical of setting a cap on alternative investments and non-UCITS investments too low – most wanted 20 per cent instead of the proposed 10 per cent.

“We are not completely happy with the suggested guidelines and want a 20 per cent cap on alternatives,” says Frank Celius, general manager at Norsk Hydro’s pension fund. The industry has also turned against Kredittillsynet’s proposals to limit non-UCITs and alternative investments to no more than 1 per cent of assets. “This will make it difficult for smaller pension funds to get access to good investment opportunities, since 1 per cent of assets is more akin to the retail market,” says Caspar Holter, senior partner at the consultancy Pensjon & Finans.

Finansnæringens Hovedorganisasjon, the Norwegian Financial Services Association, has also thrown its weight behind the debate and believes the limit for each investment should be no lower than 5 per cent, in particular for fund of funds.

Much has happened since the current regulations were set up 10 years ago. New financial instruments have emerged, there are more efficient supervisory methods and a greater focus on solvency.

“The current regulations were set up before alternative investments existed, and hardly allow for non-UCITS investments,” says Mr Skomsvold at the Pension Funds Association.

There have also been complaints that the regulatory system is far too complicated. More cross-border competition for pensions also forced the government to modernise the guidelines, since it was feared foreign firms would be given an advantage.

The regulations are expected to be in place by 1 January 2008, but the ministry of finance’s final directive is still to be delivered to the market.

“Our aim is to have them in place by the turn of the year,” says Per Øystein Eikrem, deputy director general at the ministry of finance, who claims the ministry has taken so long to decide because the matter is complex. He would not reveal if the proposals will be delivered unchanged.

“The ministry of finance has been sceptical, in particular about allowing more allocations into hedge funds, since it fears funds are not sufficiently aware of the risks. But I believe they will follow through, by and large, with what has been proposed,” says Mr Skomsvold at the Pension Fund Association.

A recent domestic scandal involving hedge funds, where local councils lost large chunks of money, is also likely to influence the ministry’s view on hedge funds. CL

Expected rules in brief

• The limit on equities and bonds will be cut - currently Norwegian rules only allow 5 per cent allocation to private equity, hedge funds, infrastructure and emerging market stocks
• At present corporate bond allocations are limited to 30 per cent and allocations to equities to 35 per cent, but these could now be removed
• Property is likely to have an upper limit of 15 per cent of assets

Printer friendly version

Email this article to a friend