Does size really matter when it comes to state pensions?

PUBLISHED: 10:44 28 September 2018 | UPDATED: 11:25 02 November 2018

This week our financial columnist looks at how pensions fare across the globe – and which country is the wealthiest when it comes to their state pension

Let’s start this week with a question you may hear if you’re attending a pub quiz: when measured by the size of its state pension fund, which country is the world’s richest?

I imagine this tricky little poser will have you mulling over an extensive list of possible candidates, from industrial powerhouses such as the USA, China (2nd) and Germany, to the globe’s major oil producers, including Saudi Arabia (6th), Iran and Kuwait (4th).

It’s none of the above – the figures in parentheses show where selected nations rank in this ultimate league table of wealth – because the answer is Norway.

Unlike the UK, which largely squandered the one-off financial benefits that accrued from the discovery of North Sea oil, those canny Norwegians squirrelled away billions of pounds of the proceeds and constructed the world’s largest state pension fund (see table below), now estimated to be worth more than one trillion dollars. Considering the size of country’s population (5.3 million), that works out at a staggering $200,000 (£152,700) each.

Established in 1990, when it was known as the Petroleum Fund of Norway, the fund’s objective was to invest the profits it enjoyed from the sale of North Sea oil. Managed by the Norwegian Central Bank, today it owns some of the world’s most valuable properties and substantial stakes in the globe’s largest companies, including Amazon, Google, Apple, Microsoft and oil giant Shell.

In a few weeks, however, Shell and several other well-known names may disappear from the sovereign wealth portfolio as the Norwegian government is expected to decide whether to dispose of all of its oil and gas investments, currently worth around $35 billion.

Officially, the fund’s managers insist that the disposal, should it take place, is part of a long term strategic plan which involves shifting from investments in traditional fuels towards renewable and other forms of sustainable energy. Any decision, they say, will not be based upon ethical considerations; instead, the managers wish to avoid what they believe are potential future risks of investing in companies producing fossil fuels.

However, should the fund decide to sell off its stakes in companies such as Shell, together with a host of other investments in oil producers, it would be interpreted as a significant boost to ‘ethical investing’, a style increasingly popular with investors and investment managers alike.

There was a time when those who advocated a form of investing based upon ethical, responsible or sustainable considerations were viewed as sandal-wearing tree-huggers. Nonetheless, these folks began by avoiding investments in tobacco or weapon manufacture and were duly mocked for their approach, usually by those who believed ethics was a county in the south of England.

This is no longer the case. But how come?

In addition to what might be called the ‘principled’ investment argument, it’s evident that institutions and individuals are making a ‘strategic’ argument by avoiding certain sectors, primarily because they believe they’re likely to face structural problems that could make them poor long-term investments.

Oil, for instance, could fall into this category as we head towards a point at which electric vehicles become cheaper and more acceptable at precisely the time when extracting oil from beneath the oceans or deserts becomes prohibitively expensive.

In other words, while ethics and principles may play a part, the financial case for embracing ethical investment becomes stronger.

So can you participate?

Yes, you can. Last week (September 20), one of the main components of TAM’s cautious and balanced ethical portfolio, the Rathbone Ethical Bond, featured in Investors Chronicle, the UK’s oldest and most respected investment magazine, where one analyst wrote: “This fund typifies stable management [and] has managed to outperform...illustrating that income and ethics can be combined without sacrifice. It is a solid, core investment-grade fund.”

The fund specifically avoids investing in companies involved in areas such as alcohol production, armaments, animal testing, tobacco and high-carbon-impact activities and crucially enjoys what IC call “an outstanding performance record”.

For almost thirty years, Norway has proved that when it comes to canny investing, size definitely doesn’t matter. As a result, investors await the Norwegian government’s forthcoming decision regarding its oil and gas investments with great interest. However, the fact that Norway’s sovereign fund is even contemplating a sale of these investments and adopting a more robust ethical investment strategy might be enough to persuade savers to follow suit.

For details of TAM’s ethical portfolio, click here.

The Week in Numbers

•£50 million

The amount being spent by Peloton, an indoor cycling firm, on marketing and development as it rolls out across the UK this week. It’s the company’s first commercial expansion outside of the USA.

•€14.3 billion

The total amount, in back taxes and interest, that Apple has been forced to pay the Irish government.

•£27 million

Estimated cost of damage to land and crops caused by wild boar in France last year. Insurers also believe they were responsible for more than 14,000 road accidents. With French government approval, wild boar hunters killed more than 700,000 of the animals in 2017.

•133 million

Number of jobs likely to be created by automation by 2022 according to a Worldwide Economic Forum forecast, outstripping the 75 million jobs lost.

For further financial advice take a look at Peter’s column, The Week in Numbers.

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