PESTLE

Political and Legal Factors

Financial institutions are heavy regulated by the government, and pension insurance firms are covered by several laws. For instance, the law of defined-contribution, “OTP-loven”, and the law of occupational pension. These regulations are crucial to secure financial stability and that the pension insurance firms do not take more risk than what the government perceives as justifiable. Norwegian pension insurance firms are regulated by the law of insurance business, "Forsikringsvirksomhetsloven". The minimum requirement of capital adequacy corresponds to 8% of the calculation base, ref. Forsikringsvirksomhetsloven § 7-3. The calculation base comprises assets items and items outside the balance sheet. These posts are given a risk weight of the credit risk that they represent (Regjeringen, 2006).

As Norway is a part of the EEA⁸, pension firms are encompassed by the Solvency regulations.

The primary goals of the Solvency Directive are to secure financial stability and assure that pension insurance companies are covered to survive a financial crisis. The Solvency margin is estimated as a percentage of the premium income from different industries. Final Solvency margin is, therefore, the sum of the highest estimation after premium income. In 2016, the Solvency II Directive was introduced with the purpose to improve the existing EU directive and regulations.

The new directive is demanding for the Norwegian pension insurance firms. They are required to have a buffer large enough to survive a 200-year crisis as of 2008, and additionally to survive another crisis right after the first one. The regulatory environment makes it possible for new entrants to enter and compete in the pension market, as the

8 EEA is The European Economic Area.

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incumbent firms might find it difficult to adjust to the new regulations. Silver is an example of a firm that did not manage to fulfill the Solvency II requirements to obtain enough capital to secure its customers in the future. The primary challenge is to assure yearly returns on the pension portfolios, even though it is not paid out for several years. To secure this, firms need to reduce the equity exposure, as the risk is too high for short-term equities (Hoemsnes, 2, 2016).

Pension funds are also subject to quantitative investment regulations, as Norway is a member of OECD⁹ and subject to IOPS¹⁰. Investments in equities, in particular unlisted, are restrained and limited at 10%. Pension firms also face limitations in self-investment, foreign currency exposure, and ownership concentration limits. The requirements are to secure the asset allocation in pension funds, to prevent “old age poverty” in the nearest future (OECD, 2017).

Economic Factors

The key policy rate is one of the most important economic factors. This rate is the interest rate that banks receive on their deposits in the central bank of Norway. It is used as a tool in monetary policy to counteract recessions and to keep inflation on a stable level. Low growth, increased unemployment, and low inflation are factors that will influence a reduced key policy rate. Since 2012, the key policy rate has reduced from 1,5% to today's level at 0,5% which is the lowest in history. The low rate acts as a tool from the central bank to avoid too weak economic activity and too high unemployment. Low rates stimulate increased borrowing, increased investments as the purchasing power improve, and eventually the inflation increases. Thus, Nordea Markets believe that the key policy rate will increase ultimo 2018.

After the rate reduction in 2012, the Norwegian economy has improved, with a stable unemployment rate of 4,1% (NTB, 2018). The low and stable unemployment rate is also good news for the Norwegian pension system. This means less public contributions to the unemployed and more contributions from the employers to the pension insurers. However, the pension insurers need to be prepared for periods with low interest rate level. One challenge is that the firms tend to invest much of the contributions profiles in the monetary

9 OECD is The Organization for Economic Co-operation and Development.

10 IOPS is the input/output operations per second and is widely used as a performance measurement.

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market and fixed income securities. Thus, more of the contribution profiles have changed investment strategies to be more aggressive towards equity exposure. For instance, both KLP and Duvi does not gradually adjust exposure in equities until investors reach respectively 52 and 60 years old. This makes them less sensitive to the interest rate level as low interest rates lower the return on the profiles.

Additionally, the savings rate is an important economic factor. The savings rate expresses how much households save from financial and residential investments relative to income.

High savings rate indicates that the consumers have a negative perspective of the future economy, aging population, or/and new pension reforms. The consumer price index (CPI) is a measure of the changes in the price level of goods and services purchased by households. The purchasing power increases if the increase in income level expected to be higher than the CPI. On the other hand, a lower CPI increases the real returns on investments. Historically, the average Norwegian nominal increase in income level has been 3,79%, while the relative CPI has been 3,14% meaning that the pension insurance firms have enjoyed the increased buying pattern.

Social Factors

The size of the population is a significant indicator of how much pension insurance firms can expect to receive from contributions. The Norwegian government forecasts a yearly population growth of 0,73%. From panel (a) in Figure 4-4, it can be seen that women have longer life expectancy than men and that life expectancy has increased the last 50 years. In the occurrence of low population growth as illustrated in panel (b), pension firms will experience fewer customers. An increased population means more customers to the firms, which again increases the pension firms’ earnings.

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Figure 4-4: Panel (a) illustrates an increased population growth relative to increased growth in life expectancy. Panel (b) shows how the Norwegian Bank forecasts the population growth out of three scenarios: one scenario where the population growth goal is reached, one scenario with high population growth and one situation with low population growth. Source: Own depiction of SSB, 1, 2018.

(a) Population growth relative to life expectancy growth for men and women.

(b) Forecasted growth in population from the year 2018 to 2100.

However, longer expected lifetime means increased pension payouts from the government.

An augmented share of elderly and increased life expectancy can be critical for the government and eventually lead to lower payouts. The 2011 reform is an example of action from the Norwegian government as it forecasted a boom of pensioners in the upcoming years. On the other side, fewer payouts from the government increase the incentive to save in the private pension market, which are positive outlooks for the pension insurance firms.

Positive outlooks make it profitable for pension insurance companies to enter the market.

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Technological Factors

There is no doubt that all of today's industries are affected by a technological change.

Advancement in technology reduces the need for local offices and staff. To grow and be visible, it is crucial for financial institutions to follow the technological change. Duvi wants to make pension savings easy and accessible for pension savers. However, Duvi is not a well-known name in the pension insurance market. Technological advances are therefore essential for them to be noticed in the market. For instance, advanced technology and excellent customer service helps pension insurers to more excellent risk management, and are crucial for the pension firms to be able to retain their market position. As Norwegians know so little about pension, it is extra important for the firms to be visible and explain their products as easy as possible. This will eventually attract customers.