Norway’s Government Pension Fund Global Sets Limit of $25 Million for External Manager Bonuses

(October 9, 2011) — Norway’s $530 billion Pension Fund Global has placed a cap on performance-related management fees, according to new regulations introduced by Norges Bank Investment Management (NBIM).

In a release by the fund, Norges confirmed that as of August 10 — in order to encourage a longer-term investment strategy — it was agreed that external managers would not receive more than $25 million annually in bonus payments for individual mandates.

The decision by the fund follows an earlier investigation by the country’s Auditor General. In 2009, the fund implemented an undisclosed cap after it paid hefty bonuses to two managers.

The fund stated in a release: “As reported before, NBIM introduced a ceiling for the fees paid each year under all new agreements with external managers back in 2009. Any fees accrued beyond this ceiling may be paid out at a later date, but only if the excess return from inception continues to be at least as positive. The practice now established for the payment of fees to external managers is reflected in the Executive Board’s investment mandate for NBIM’s CEO. Last amended on 10 August this year, the investment mandate requires agreements with external managers to contain an upper limit for the payment of fees in the form of a specific maximum amount. This amount must not exceed 25 million US dollars per year per investment mandate. Our implementation of the new requirement in the fourth paragraph of section 1-4 would therefore mean that agreements with external managers will contain an absolute limit for the payment of annual fees for each particular mandate.”

The letter continued: “The fees recognized in the financial statements in any one year may be higher than the fees actually paid out. Under applicable accounting rules, the recognized amount must include not only actual payments but also provisions for liabilities arising during the financial year in the form of accrued but unpaid fees. In the event of high excess returns and the ceiling for payments being exceeded in a particular year, the management agreements are designed in such a way that the recognized liability will never exceed the ceiling for the following year.”

As of the end of the second quarter, the fund had 199 billion kroner of its stocks externally managed. Overall 6.8% of its assets were managed externally. In its annual report, the fund revealed earlier this year that it handed out 14 specialist stock mandates in 2010.