The Norwegian Government Pension Fund Global (GPFG) is the largest sovereign wealth fund[i] globally, with assets valued in Canadian dollars in 2023 at $1.95 trillion in total assets.
Norway’s population is 5.4 million. If Canada had a similar per capita-sized fund, it would be approximately $14.8 Trillion[ii]. Using a relative GDP level, Canada would need a fund of $7 Trillion to match Norway.
Either way, Norway's fund is huge! The Canadian existing equivalent to the GPFG is the combined Canada and Quebec Pension funds, which reached $487.9 billion in 2019. Norway’s current pension fund is more than 28 times larger![iv]
How did Norway do this? Better still, what can we learn from this amazing success story?
Source of Norway's riches
Norway's money has come from booming North Sea oil field revenues, hence the nickname ‘Norway’s Oil Fund.’ But only half the fund was from yearly contributions. The other half came from compounded returns, demonstrating the value of long-term investing as proposed by Bensway Funds Generators.
Alberta's Heritage Savings Trust Fund, which began in the 1980s and ironically inspired Norwegians to start their fund, has reached $21.6 Billion. Soon after starting the fund, Alberta chose to use most of their windfall resource revenue for current needs vs saving for the future. Alberta's experience demonstrates what happens if you do not benefit from long-term compounded growth.
Comparing the success of Alberta to Norway is unfair. Norway's earnings per barrel is almost sixty times that the Alberta government receives based largely on much lower Alberta barrel prices and taxes.
Oil was first delivered from the Norwegian North Sea fields in 1971. Their first deposit into their GPFG fund was made in 1996, 25 years later. This was because, at first, revenues were small, and the government could not see the benefit of a large savings plan.
But eventually, by the mid-90s, Norway's revenues grew so large that the need to protect their economy and build for future stability was too compelling. Building the Norway fund has – so far – been a 26-year process, with 23 years of net contributions and three years of net withdrawals. Norwegian Oil is estimated to have another 69 years of known reserves!
So what?
While the speed of Norway's fund growth is phenomenal, the interesting part is that Norway pulled this off and continues to build up the funds.
What is exciting is that this proves a large public fund can be created today and put to good use.
What opportunities does this fund give Norway?
Fund payouts are the main benefit, spread over decades ahead. Norway could do many things with the capital they have now, even as the fund continues to grow. Norway currently uses 3% of the fund's growth for annual government budgets.
We have previously discussed the opportunity of eliminating Canadian taxation. Norway could eliminate its taxation by about the year 2040. After 2040, limiting spending to 4% annually of their then-fund value of $4.95 T would let Norway remain tax-free for centuries.
They will, however, need more money to stay tax-free. As population size grows, the government requires more money for larger programs and, ideally, increasingly comprehensive charitable expenditures.
Norway could easily meet these added needs. Since doubling of assets takes roughly only 15 years more and would add a massive $5 Trillion to their plan, Norway could simply wait a bit longer.
By 2055, funds would reach double the tax-free fund level required, permitting Norway not only to eliminate taxes but also to continue to fund the growth of its economy significantly.
Think about that: this is within 32 years from today, and in total, 57 years since the fund began in 1998. With their current rules on spending and 69 years of reserves, this tax-free growth outcome appears very likely to be achieved.
Could the rest of the world learn to do this?
A few learning opportunities are apparent. Norway answers some questions applicable to the Bensway Funds Generator project.
What were the political and economic considerations before the Norwegian fund started, and how would that compare to North America today?
What investments are they involved in with this Norway fund, and what might that suggest for our fund generators?
How are Norwegians paid out from this fund, and what might we learn from that?
How do Norwegians regard their fund, and does that help it keep going?
1. Starting conditions
At the time of creating the oil fund in 1996, Norway was experiencing a period of economic growth due to its oil industry. However, the country’s leaders were aware that oil revenues would eventually decline, so with this in mind, the Norwegian parliament passed legislation to create the GPFG.
The main reasons for establishing Norway's Oil Fund were to give the government 1) room to move within their fiscal policy should oil prices drop or the European mainland economy contract, 2) to mitigate volatility stemming from fluctuating oil prices, 3) to manage the financial challenges of an ageing population, and 4) to avoid the oil revenues gutting out other exports due to currency increases. This last reason is also known as the 'Dutch Disease' as the Netherlands' oil discoveries in the 1950s led to the gutting out of the Netherlands' other exports due to currency increases.
The GPFG fund was created to store the current temporary rush of oil revenue and had strict government-determined rules on spending only the real return, ensuring wealth generated from these resources would benefit future generations.
Norwegians may have been more accepting of establishing a government fund than other countries. Public opinion of the government in Norway at 65.7% favourable in 1998 was nearly twice that of North America (37.3% for Canada, 29.8% in the USA).
Furthermore, Norway had a relatively far lower wealth imbalance when the fund began. Using the Palma ratio, an average individual in 1995 in Norway's wealthiest 10% owned 6.2 times the average of an individual in the lowest 40%. As of 2021, Canada would be 15 times, and the USA 20.7 times.
So, with less trust in government, no new unaccounted-for surpluses to affect our economy and poorer inequality conditions than Norway, Canadians today could be far less accepting of setting aside billions for the long term.
Applying this to Bensway: Bensway, however, does not ask for billions and billions every year, as it recommends a much longer term (121 years for Canada to eliminate taxes vs 57 for Norway). Raising a one-time start-up amount of $25 Billion (vs an average of $30 Billion annually by Norway) could be arranged, say, with $5 Billion saved for five years. Five billion dollars would represent less than one percent of Canada's annual taxation.
However, our representatives' political will rarely support such long-term visions. Canadians may need to start this as a smaller grassroots initiative, such as a Bensway Funds Generator. Smaller is OK. It just takes longer to achieve the eventual goal.
2. Norway's Investments
Norway's fund invests only in financial instruments held primarily outside of Norway to reduce interference in their own economy. A small position is held in more than 9,000 companies worldwide. The fund is invested in 70 countries to achieve broad exposure to global growth and value creation and ensure good risk diversification. The fund is divided into four investment areas: equities (70%), bonds (21%), real estate (7%), and renewable energy infrastructure (2%).
Norway's fund management comes under fire for not being very creative with the investments it makes, being compared largely to an 'index tracker' - i.e. just investing in index-held financial instruments. Better results may be possible with the use of investments in private equity hedge funds, infrastructure projects and the like, but investment management costs would also increase.
Interestingly, some government parties question whether the fund is too big and should be split up to diversify investment management approaches.
Norway is able to influence global affairs and punches above its weight category by virtue of the fund investments. Norway's fund sets clear expectations of the companies and markets they invest in. Companies must be run properly, and shareholder rights must be protected. Companies must also understand how they impact the environment and society and address negative impacts. These expectations are based on international standards such as the UN Global Compact, OECD guidelines and the UN Sustainable Development Goals.
Enacting social responsibility within an investment portfolio is a journey. In 2019, Norway’s oil fund made a historic breakthrough by investing billions of dollars into wind and solar power projects. In the same year, Norway’s parliament voted plans into law for the fund to dump investments in eight coal companies and an estimated 150 oil producers.
Applying this to Bensway: Bensway would similarly support responsible investing by the proponents of the day. In addition, Bensway would include some social impact investing, discussed here, that can partially counter the concern that money, while invested, is delayed from doing good. In fact, Benjamin Franklin's fund was a form of social impact investing by loaning young artisans start-up funds.
Bensway would also benefit from setting a target size when the fund splits itself in two. The benefit of eventually different investment management approaches should improve performance. Multiple funds generator replicas also harden up the fund against attempts to abscond with the dough.
3. Norway's fund payouts
Budget surpluses for Norway's government are transferred to the GPFG fund, while deficits are covered with money from the fund. In other words, the authorities can use more from the fund in hard times and less in good times.
On average, the government is to spend only the equivalent of the real return on the fund, estimated at around 3 percent per year. Even just 3% of the fund already represents almost 20% of Norway's government's budget.
The Norwegian government has been careful not to ramp up spending to use up surpluses for at least 23 years of the funds 26 years. Their ability to do this rests on the relatively small inequity of wealth and strong bipartisan support to continue the fund's growth.
Applying this to Bensway: Bensway Fund Generators take an apolitical stance by directing via contract how the fund is to be paid out, for example, having 50% of the fund to be paid out every 25 years from contribution dates. Once paid to charity, the charity can then decide how quickly to spend their gift.
4. Public Opinion
Mona Elisabeth Brother, a Norwegian diplomat, considers her nation's philosophy:
“As we [the people of Norway] engage in the discussions around the fund, it is clear that Norway's GPFG is more than a national instrument for savings - it represents a nationwide philosophy to safeguard and build financial wealth for future generations.”
A quote from this article sums up public opinion about the fund:
"In terms of the broader Norwegian society, citizens are in the main proud of the fund and engage in daily discussions about fund-related issues. Norwegian civic society seems to share the GPFG's philosophy of protecting and creating financial wealth so that it can continue to benefit future generations."
Discussions in Norway centre around responsible investment vis-a-vis ESG goals and around how to increase the returns. Some would like higher spending but recognize the value in sustaining the fund.
Some of the pride is in avoiding "Dutch disease." By slowly absorbing the wealth, the Norwegian economy is now one of the more robust in the world. Their wealth fund approach is a model for other governments to consider.
Norway used a pragmatic approach to deal with an enormous windfall. Norway managed to agree to sustainable spending rules to start the fund and has broad support and pride across the political spectrum.
Applying this to Bensway: Bensway is an approach to create future windfalls that direct future payouts to charitable purposes. As part of the Bensway program, engaging with society's many civic sectors and building support will be important.
While initial contributors support the Bensway vision, broader positive public opinion will come when the payouts become significant. Celebrating those payouts would be one way to build public awareness and acceptance.
Bensway can learn from Norway's success.
Ideas to help Bensway include:
Save first, then strictly spend only a small portion of the funds.
Keep investments flexible and responsive to social expectations.
Having rules to direct savings and payout plans is essential.
Public opinion counts, so celebrate the payouts.
Photo by Simon Williams on Unsplash
[i] 5 Largest Sovereign Wealth Funds (investopedia.com) [ii] All funds are shown in Canadian dollars for this article. [iii] Calculated by $295 Billion / 848.8 B = 35% [iv] Calculated by $495 Billion/ $14 Trillion = 3.5%. Relative size is $14 T / 495B = 28.5
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