Norway Commission Recommends Against Oil Divestment

A commission appointed by the Norway government has recommended against the country’s $1.04 trillion Government Pension Fund Global (GPFG) divesting petroleum stocks, saying it wouldn’t do much to protect the fund against sell-off in oil, while at the same time complicating its investment strategy.

“Divestment of the energy stocks in the Government Pension Fund Global (GPFG) is not an effective insurance against a permanent decline in oil prices,” commission chair Øystein Thøgersen said in a release. “The energy stocks only contribute marginally to Norway’s oil price risk.”

Last November, Norway’s central bank, Norges Bank, which manages the fund, recommended that oil stocks be removed from the fund’s benchmark index. It said the vulnerability of the country’s assets to a permanent reduction in oil and gas prices would be reduced if the fund were not invested in energy stocks.

At the time, the bank said that its conclusion was based solely on financial arguments, and did not reflect potential future movements in the oil price, or the profitability or sustainability of the sector.

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The commission was asked to assess whether the GPFG should be invested in energy stocks, such as stocks included in the energy sector as classified by the FTSE Russell index. It said that after taking several factors into consideration, it recommends the GFPG should remain invested in energy stocks.

Energy stocks only made up approximately 4% of the total value of the country’s sovereign wealth fund, or approximately NOK315 billion ($37.8 billion) as of the end of 2017.

The commission said it agreed with Norges Bank that the value of energy stocks is linked to the oil price, especially in the short term, and added that in isolation, this would suggest a reduction of the fund’s investments in energy stocks is prudent. However, it pointed out that it had been asked to take multiple considerations into account—not just financial ones—including the need for, and the benefit of, an insurance against a permanent decline in the value of Norway’s oil and gas resources.

“In a scenario with sustained lower oil prices, the loss in the government’s net cash flow from petroleum activities will be substantial,” said the commission. “However, only around 1% of such a loss will be covered if the GPFG is not invested in energy stocks.”

The commission said a sell-off of energy stocks would also “challenge the current investment strategy of the fund,” with broad diversification of the investments and a high threshold for exclusion.

“This investment strategy is simple, well-founded and has served the fund well,” said the commission. “If energy stocks are excluded from the fund, the composition of the investments will differ from market weights, and the fund will be expected to either achieve lower return or higher risk.”

It added that there is not much of a need to insure Norway’s wealth against a permanent reduction in the oil prices because the country has a high capacity to take on oil price risk, in part because it has a fiscal policy framework in which current oil revenues are placed in the GPFG rather than being spent.

Tags: Government Pension Fund Global, Norges Bank, Norway, oil and gas

The Weyerhaeuser Co., one of the world’s largest private owners of timberlands, said it will transfer a portion of its US pension assets and liabilities to an insurance company by purchasing a group annuity contract. The company said the move will reduce the liabilities of its US pension plan while maintaining its current funded status.

Weyerhaeuser will also allow certain US pension plan participants to elect an immediate lump-sum distribution, which will be paid from plan assets during the fourth quarter of the year.

Weyerhaeuser said that following the lump-sum distributions, it will transfer a portion of its US pension assets and liabilities to the group annuity contract. As part of the group annuity contract purchase, the insurer will assume responsibility for annuity administration and benefit payments to select retirees. The transaction is expected to close in 2019, and there will be no change to retirees’ pension benefits as a result of the group annuity transaction.

The company said it expects the lump-sum and group annuity transactions will reduce the pension liabilities of its US plan by approximately 30% and reduce the number of plan participants and beneficiaries by approximately 50%.

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In order to maintain the plan’s current funded status, Weyerhaeuser said it will contribute approximately $300 million (approximately $186 million after-tax) to its US pension plan during the third quarter of the year. The contribution will be deductible at the company’s combined 2017 federal and state tax rate of 38%.

Weyerhaeuser also said its US pension plan assets will be transitioned to an allocation that will more closely match the plan’s liability profile in the future.

“We are committed to maintaining financially secure pension benefits for our pension plan participants,” Weyerhaeuser CEO Doyle Simons said in a release. “These actions will position us to better manage future pension plan costs while maintaining continued benefits security.”

The company expects to record one-time non-cash pension settlement charges on completion of the lump-sum offer and annuity purchase, with amounts to be determined when each transaction is concluded. Last week, Weyerhaeuser’s board of directors approved to raise its dividend 6.3% from the previous quarter to $0.34 per share.

Tags: Annuity, Pension, Weyerhaeuser