Norges Bank Calls for Gas, Oil Stock Removal from GPFG Benchmark

In a move that Norges Bank ($1 trillion) feels will decrease the vulnerability of the Norwegian government’s wealth to permanent gas and oil price declines, the world’s largest sovereign wealth fund recommended the removal of oil and gas stocks from the Government Pension Fund Global’s (GPFG) benchmark index in a Thursday letter to the Ministry of Finance.

“The Bank’s advice has largely been based on how changes in the investment strategy can be expected to affect return and risk for the fund in isolation. The fund now accounts for a much larger share of the government’s wealth than before, and is an integral part of fiscal policy via the fiscal rule,” the letter said. “For that reason, in the strategy plan for Norges Bank Investment Management 2017-2019, the Executive Board states that in the period ahead, it will adopt a broader wealth perspective when advising the ministry.”

According to the bank’s analysis, GPFG investments and its stake in Statoil result in a total exposure to gas and oil equities twice as large as it would be for a broad global equity index. The letter reveals that, based on estimates from a whitepaper titled “Long-term Perspectives on the Norwegian Economy 2017,” the current value of future government oil and gas revenue is roughly “4,000 billion kroner” ($4.8 trillion) The ministry’s calculations state that “a permanent drop in oil prices of 100 kroner per barrel would more than halve the present value of future oil and gas revenue,” a huge blow to the Norwegian economy.

While oil and gas prices generally rise and fall with the broad equity market—usually during periods of stability— the bank indicated there have been periods where oil and gas prices move contrary to the broad market as well. In addition, oil prices also impact returns in other equity sectors.

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To decrease the government’s vulnerability to oil and gas shocks, the bank proposed the fund remove oil and gas companies that are classified as such by the FTSE equity benchmark index from the GPFG’s benchmark index.

“It is the bank’s assessment that the government’s wealth can be made less vulnerable to a permanent drop in oil prices if the GPFG is not invested in oil and gas stocks,” the letter said. “If the relationship between long-term returns in the broad equity market and oil and gas stocks persists, neither the expected return nor the market risk in the fund will be affected appreciably by whether or not the fund is invested in oil and gas stocks.”

Oil and gas equities currently account for roughly 6% of the GPFG’s benchmark index at just over NOK 300 billion ($36 billion).

Tags: ESG, Ministry of Finance, Norges Bank, Sovereign Wealth Fund

The Pension Benefit Guaranty Corporation (PBGC) reported in its annual report that the deficit in its insurance program for multiemployer plans rose to $65.1 billion at the end of fiscal year 2017, up from $58.8 billion the previous year.

The PBGC attributed the increase to the ongoing financial decline of several large multiemployer plans that are expected to run out of money in the next decade.

“Our attention is focused on the dire financial condition of the multiemployer program,” said PBGC Director Tom Reeder in a release. “We are engaged with trustees of troubled plans to help them protect benefits and extend plan solvency. We will continue to work with the administration, Congress, and the multiemployer plan community to create solutions so that PBGC’s guarantee is one that workers and retirees can count on in the future.”

However, unlike the multiemployer program, the deficit for PBGC’s single-employer insurance program was nearly cut in half during the year, falling to $10.9 billion from $20.6 billion at the end of fiscal year 2016. The PBGC said the drivers of its continued improvement include premium and investment income, as well as increases in the interest factors used to measure the value of future liabilities.

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“We are pleased that the financial condition of the single-employer program is improving, consistent with our projections,” said Reeder.

As of Sept. 30, the multiemployer program had liabilities of $67.3 billion and assets of $2.2 billion. The increase of $6.3 billion in liabilities during the year were mainly due to 19 plans newly classified as probable claims because they either terminated or are expected to run out of money within the next decade.

The PBGC provided $141 million in financial assistance to 72 insolvent multiemployer plans during fiscal 2017, compared to last year’s payments of $113 million to 65 plans. The PBGC said the demand for financial assistance from PBGC will increase as more and larger multiemployer plans run out of money and need help to provide benefits at the guarantee level set by law. It said the assets and income of PBGC’s multiemployer program are only a small fraction of the amounts PBGC will need to support the guaranteed benefits of participants in plans expected to become insolvent during the next decade.

In its most recent projections report, the PBGC estimated that without any changes in the law, its multiemployer program will likely run out of money by the end of 2025, and possibly sooner. The PBGC added that if the multiemployer insurance program becomes insolvent, PBGC will only be able to provide enough financial assistance to pay a small fraction of guaranteed benefits in insolvent plans.

Meanwhile, the PBGC’s single-employer program had liabilities of $117 billion, and assets of $106 billion as of Sept. 30. The deficit of $10.9 billion is a $9.7 billion improvement from $20.6 billion last year. In fiscal year 2017, the agency paid $5.7 billion in benefits to nearly 840,000 retirees, which is the same as last year.

In its report, the PBGC said it became responsible for 82 single-employer plans that terminated without enough money to provide all promised benefits during the year. Those plans cover 23,000 current and future retirees. In addition, PBGC helped to protect nearly 27,000 people by taking action in Chapter 11 cases to encourage companies to keep their plans ongoing upon emerging from bankruptcy. It also negotiated two agreements under its Early Warning Program that provided nearly $600 million in financial protection for more than 240,000 people in plans put at greater risk by corporate transactions.

While the PBGC’s two separate pension insurance programs are both designed to protect participants’ pension benefits when plans fail, they differ significantly in the level of benefits guaranteed, the insurable event that triggers the guarantee, and premiums paid by insured plans. By law, the two programs are financially separate, and the assets of one program may not be used to pay obligations of the other.

Tags: Multiemployer Pension Plans, PBGC, Pension