Norway’s Norges Bank Investment Management (NBIM) has proposed an alternative rule for Government Pension Fund Global (GFPG) withdrawals that aims to address short-term cyclical requirements while preserving long-term values of the fund.

The Norwegian government can withdraw up to 3 per cent of the fund’s value each year.

NBIM used a simulation model of equity and fixed income returns, the Norwegian fiscal budget, the Norwegian krone exchange rate, and petroleum revenues to simulate the development of the GPFG and the Norwegian budget to help understand the trade-off between two broad aims of the fiscal spending rule in Norway.

It noted that while spending in line with expected returns aims to preserve the real value of the fund, withdrawals from the fund contributed to counter-cyclical budget deficits in Norway.

Using the simulation mode, it showed how a misalignment can arise between the objectives of sustainable and cyclical withdrawals.

“When spending in line with expected returns, fund withdrawals do not match withdrawals required to finance fiscal deficits determined by the Norwegian business cycle,” NBIM stated.

“When withdrawals are used to accommodate counter-cyclical spending, there is a higher probability of depleting the real value of the fund over the long term.”

The investment manager showed that commonly proposed rules for guiding withdrawals, such as spending cashflows or smoothing spending, are also subject to this trade-off.

It therefore outlined an alternative rule that seeks to address short-term cyclical requirements, while also attempting to preserve the long-term values of the fund.

The rule aims to reduce the fiscal deficit over time, and NBIM said that the target deficit and pace of reductions can be adjusted to balance risks across the short and long term.

“Withdrawals based on this rule are closely aligned with the Norwegian business cycle, and they do not directly depend on the value of the fund,” NBIM stated.

“Since the rule sets withdrawals in line with GDP, the average level of withdrawals needs to be reduced over time.

“This shifts the distribution of the fund to the right, reducing the likelihood of depleting the fund over the long term.”

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