Although it is not widely known as one of the financial capitals of the world, with the likes of London or Frankfurt usually springing to mind, over the last few decades, Norway has quietly been building one of the most robust pension sectors found anywhere in the world.
Due to a relatively small population and the significant natural resources, they have to draw on, the pension system in Norway has bucked the trends of even its closest regional neighbors. According to recent reports, poverty among pensioners in Norway has been dramatically falling in recent years, despite stagnating wages and increases in living costs.
The Norwegian state pension system has historically taken the form of a defined benefit scheme, comprised of a flat-rate universal benefit along with an earnings-related, second-tier benefit scheme. In recent years, a new scheme has been introduced, which consists of a defined benefit scheme with a minimum pension rate guaranteed by the state.
To benefit from this state pension scheme, you will qualify once you have lived or worked legally in Norway for at least three years. Your entitlement is calculated on the basis of the number of years you have been making payments into the Norwegian National Insurance Scheme. In terms of the age at which you can start to benefit from your pension, generally speaking, this will range anywhere from 62 to 75 years of age. While the official retirement age is 67, certain public sector employees may retire early, at 62. You will continue to receive a state pension for as long as you are alive.
It should also be noted that the state pension in Norway is not the only pension scheme that citizens can benefit from. In addition to pension payments from the national insurance scheme, citizens may also benefit from a pension scheme from employers, as well as from private pension savings.
But what has made the pension sector in Norway so successful in comparison to other countries?
In terms of where the pension funds that get paid outcome from, the Government Pension Fund of Norway is made up of two distinct investment funds, each of which has a specific investment mandate.
The first of these is the Government Pension Global Fund (GPFG). This is also known as the ‘Oil Fund’ and it was set up in 1990 to take surplus revenues from the Norwegian petroleum sector and invest them for the benefit of Norwegian citizens. Currently, it is one of the largest sovereign wealth funds in the world and hit a total value of a staggering $1.2 trillion as of late 2020.
The second fund is the Government Pension Fund of Norway, which acts as a kind of national insurance fund. It is much smaller than the GPFG and focuses mainly on domestic and Scandinavian investments.
These generous pension schemes are also a contributing factor to the abnormally high taxation rates in Norway – not so much as a direct result of taxes being pooled into the pension funds, but rather that the pensions more than offset the loss of income in earlier years. Norway has strict taxation rules – it has, for example, an effective 31.66% tax on investments like stocks and bonds, compared to 20%, 15%, or even 0% based on tax bracket in the U.S.
This is also reflected in income declarations in the country. With the banning of all non-State gambling organizations in the country, a great many Norwegians are forced to look abroad for other top online casinos such as Casinotopplisten.com. This income gained from abroad must be declared as per Norwegian tax laws. The country even words said gambling laws in such a way that the casino, or transaction intermediary, is the one at fault for providing services, rather than the player for using them. This encourages residents to declare gambling winnings as legal income without fear of backlash.
Although much of the wealth of the Norwegian pension fund has been built off the back of profits from the oil and petroleum industry, in recent years, Norway has sought to divest investments within the fund from oil and gas holdings. Towards the end of 2017, recommendations were made to divest around $35 billion worth of oil and gas holdings from the fund’s equity index.
This marks an interesting investment strategy, as it appears that ethical concerns have been put ahead of maximizing profits. An interesting comparison can thus be made between the sovereign wealth fund operated by Norway and that of, for example, the United Arab Emirates. The UAE sovereign wealth fund is one of the largest in the world and has also been built off the back of their massive profits from the oil and petroleum industry. Similarly, the UAE investment fund is operated in accordance with the moral principles of Islamic finance.
Although vastly different in terms of culture, climate and history, we can nevertheless see that there are some similarities between Norway and the UAE in terms of how they are using access to natural resources as a way of building up their sovereign wealth, and it is this strategy that has helped Norway to build one of the most successful pension funds in the world. As the world slowly shifts away from carbon fuels, however, both the UAE and Norway are faced with adapting their investment strategies to meet the move away from oil and natural gas. How successfully they will be able to do so, however, remains to be seen.