Annual report 2022KLP Kapitalforvaltning AS

The portfolio management results were marked in 2022 by the weak growth in the securities markets, which gave poor absolute returns to customers in both equity and fixed income funds. The company has consistently delivered good relative results in its portfolio management areas, in relation to its targets and to relevant benchmark indices and comparable competitors.

The company was successful in selling fund products to institutional investors and retail customers in the Norwegian market in 2022. Net new subscriptions for customers outside the KLP Group came to more than NOK 13 billion. Capital belonging to such customers accounted for about 55 per cent of the total assets in the KLP funds at the end of 2022.

The company handles a large number of transactions in financial instruments. Around 31,000 different financial instruments are valued in the portfolio system on a daily basis. In 2022, more than 1.1 million entries were registered in the company's management system, which is a slight reduction from 2021.

In 2022, 39,000 securities trades and 6,000 foreign exchange trades were carried out. 29,000 corporate actions related to financial instruments were processed in the portfolios. In 2022, share classes were started for all ordinary mutual funds. At the end of the year, 127 prices were quoted daily for share classes in a total of 43 mutual funds. The focus on strengthening the operating environment continues, to ensure secure handling of the growing complexity and scope of the asset management.

The company exposure to direct credit and market risk is limited. The company is equity-financed and does not have any interest-bearing debt. The company’s financial strength is good. The company’s financial assets are mainly invested in fixed income funds with a good diversification of risk and low credit and interest-rate risk.

The liquidity risk is very low because the company does not have any interest-bearing debt, the income from management is accrued monthly, and there are significant sums invested in fixed-income funds which can be realised at short notice. The company’s assets under management are largely related to long-term investments from customers, which under normal market conditions are a stable long-term source of income.

The company has indirect exposure to market price movements because management fees from the KLP funds are directly influenced by the amount of assets under management. This means that a general fall in market values will reduce the company’s ongoing revenue from the KLP funds. The amount of the company's equity is commensurate with this risk of loss of income, so it will be able to maintain operations even in the event of a significant loss of income and/or increased costs.

The company’s biggest risk in the short term is operational risk. This is the risk of direct or indirect losses resulting from failing internal processes or systems, errors made by employees or external events. This includes risks related to IT systems, information security and compliance with official requirements. The external threats relating to information security, complexity in the business and the scope of regulatory requirements are major drivers for such risk.

The company spends considerable resources on internal control and compliance to keep track of, manage and limit the company’s operational risks. There is ongoing work to increase the degree of automation of central processes, as well as quality assurance of procedures and systems.

Handling sustainability risk is an integral part of the company's management and decision-making processes. The company works actively to limit sustainability risk in its own operations and through its supply chains. Integration of corporate social responsibility into the management of customer funds is discussed in more detail below.

The Board has conducted an annual review of the company’s risk management and internal control, where the risk of not achieving the company’s strategic objectives is measured on the basis of identified commercial, asset management-related, financial, operational and political risks. This confirmed that the company has implemented a prudent framework for the risks in its business. The Board has also carried out an annual review of the company’s risk and capital needs, setting a capital need for the next 12 months. At the end of 2022, the company’s own funds exceeded this capital need by a good margin.

The basis for KLP Kapitalforvaltning’s responsible investment work is to deliver secure and competitive management of pensions and savings in a responsible and sustainable manner. The company’s influence on corporate social responsibility and sustainability is greatest through its management of pensions and savings, including its investment in and ownership of companies. The management strategy is built around accepted international standards, such as the UN Climate, Nature and Sustainable Development Goals, and the risk posed by the world’s sustainability challenges to our own activities. The strategy encompasses key issues such as human rights and labour rights, climate and environmental impact, good corporate governance, anti-corruption, tax and transparency, and other financial crime, as well as gender equality and diversity.

KLP Kapitalforvaltning AS aims to be a leading asset manager in the area of responsible investments and to integrate this into all of our operations. We have committed to this through KLP’s membership of the UN Global Compact and by signing up to the UN Principles for Responsible Investment (PRI). The company has set objectives for all portfolios to be better at sustainability than the market in general. The majority of the portfolios under management meet this requirement.

At the end of 2022, 758 companies were excluded from the investment universe for the KLP funds because of breaches of the guidelines. For these companies, 348 issuers were included in the KLP funds' benchmark indices, and 209 issuers were included in the benchmark index of bond funds investing in credit bonds internationally. 142 new companies were excluded, and 55 companies were included. The majority of exclusions are due to violations of the product criteria for KLP and the KLP funds, and the disposal of shares in Russian companies as a result of the war in Ukraine. The rest of the exclusions were violations of other ethical criteria, including human rights and corruption.

The company has followed up 259 companies in its active ownership work on various topics related to ESG. There have been 45 improvements noted in companies that have been followed up by the company. KLP has voted at about 99 percent of all general meetings at which it had voting rights - 8,902 general meetings in all. Through 2022, the company worked to adapt its Nordic Swan eco-labelled funds to new criteria which will come into effect in March 2023, and the implementation of the SFDR.

Håvard Gulbrandsen is the Managing Director of the company. KLP’s Chief Finance Officer, Aage Schaaning, took over as Chairman of the Board on 1 January 2023 from CEO Sverre Thornes. At the end of the year, the company had 73 permanent employees. It also had six employees in temporary positions. The employees have been represented on the Board of Directors since 2007. Work has been ongoing throughout the year on leadership development, culture and values as well as training for the company’s employees. The operational environment has been strengthened, and we are working to streamline every part of the company’s data flow.

The working environment is good, and human and employee rights are addressed in the company’s policy guidelines. Sick leave was low in 2022, at 1.26 per cent in total, split between 1.02 per cent short-term absence and 0.24 per cent long-term absence. No employees were injured or suffered any accidents at work in 2022.

The total payments of ordinary salary to the company’s employees were NOK 89.9 million in 2022. The company’s employees also have a defined-benefit pension scheme like the one KLP offers to its customers. Employees who are directly accountable for the management of clients’ assets, and their managers, are included in the company’s performance-related pay scheme. A total of 21 employees were covered by the scheme in 2022. Provisions of NOK 33.4 million have been raised in the accounts for performance-based pay accrued in 2022, excluding employer’s National Insurance contributions and financial taxes. The main features of the performance-based pay scheme are disclosed in the prospectuses for the KLP funds. The remuneration scheme in the company, including the performance-based pay scheme, has been largely retained from the previous year.

The company strives to be an inclusive workplace with a working environment characterised by diversity, gender equality and mutual respect. This strengthens value creation, increases employee satisfaction and contributes to good attitudes and actions. It is also a prerequisite for the company to achieve its goal of being a socially responsible enterprise. We expect our suppliers and partners to take gender equality and diversity seriously in their own operations and in their own supply chains. We also look out for gender discrimination in relation to workers’ rights in the investment processes.

Three out of six Board members are women, along with four out of twelve managers in the company. 34 per cent of the employees are women. Most of them work within our operating environment. Gender-based statistics on the company’s employees, salaries, job categories, working hours and parental leave were drawn up at the end of 2022. The results of this survey are set out in the KLP Group’s sustainability accounts, which are included as an appendix to the Group’s annual report for 2022.

The company has a preponderance of men, both in the number of employees and in employees in the highest paid positions. This is a challenge that exists right across the finance sector. The company is working hard to attract more women in order to achieve a better gender balance, especially in portfolio management positions and in the company’s IT function. Efforts are being made to promote gender balance through the recruitment process, including actively searching for well-qualified candidates of both sexes before hiring. An internship scheme has been established for students where one of the goals is to help recruit more talented young people of both sexes. In 2022, the company hired two of the internship candidates into permanent positions starting in summer 2023. The company also participates in professional events and lectures, as well as arranging webinars and podcasts, to raise its profile as a leading asset manager and an exciting place to work with a socially important function. KLP Kapitalforvaltning AS wants to hear from all qualified jobseekers, regardless of gender, ethnicity, religion, beliefs, disability, sexual orientation, gender identity, gender expression and age.

In order to improve the gender balance, it is also important to develop and retain female employees. The company has good parental leave arrangements and is a flexible workplace which caters for individual needs. Training and professional development are emphasised in staff appraisals. There are regular assessments of differences in pay between men and women, to ensure that these are not related to gender. The company has arranged for younger employees to have a network and a social meeting place in the enterprise, to create a sense of well-being and belonging.

The company adheres to KLP’s Group-wide equality goals linked to equal pay, career and development opportunities, and representation on committees and projects. The company has established specific targets to achieve a balance between the sexes by 2025, where balance is defined as being within 40-60 per cent split between the sexes. There is also a Group-wide goal for a similar gender balance in management and other senior positions. Please refer to the annual report for the KLP Group for a more detailed account of the Group-wide objectives.

Work towards gender equality and against discrimination is based on common guidelines and work across the Group, as well as processes at the local level within the company. The risk of discrimination or other obstacles to gender equality in the company is considered to be low, given the measures that have been established. Efforts to follow up on objectives, evaluate and implement measures will be prioritised in the future.

The company does not pollute the external environment and lays great emphasis on reducing its own climate and environmental impact through the parent company’s work with environmentally certified offices and operations.

2022 was a weak year for most markets and asset classes. Inflation fears gradually replaced the relief at seeing the back of the pandemic, and the equity markets started to fall sharply from the end of the first quarter. The broad stock market index MSCI World (measured in local returns) fell 16 per cent through the year, while the fall in the Norwegian stock market was dampened by high energy prices and ended with a fall of 1 per cent (Oslo Børs Benchmark Index).

Long-term interest rates rose considerably through the year. Both US and Norwegian interest rates started the year below 2 per cent, before rising to around 4 per cent, and ending the year at 3.9 per cent and 3.3 per cent respectively. This movement resulted in that fixed income funds with long duration had a significant negative return in 2022, with KLP Obligasjon Global ending with a negative return of 15.4 percent.

The Norwegian krone depreciated sharply through the year. In the first quarter, it was mostly below 9.00 against the USD, but ended 2022 at almost 10.00 against the USD.

There is normally considerable uncertainty associated with assessments of future conditions. However, the Board considers the market outlook for the company to be favourable. Over time, the KLP Group’s total assets are expected to grow, with the expectation of a great bulk of the increase being invested in products delivered by KLP Kapitalforvaltning AS. Stable good results from index-tracking and continuing increased interest from external customers provide a basis for further growth in assets under management. Developments in recent years following the introduction of tax-favoured saving in funds and restructuring of pension schemes in the private and public sectors have increased the interest in personal saving in mutual funds. The company is well positioned to take an increasing share of a growing savings market in the years ahead. The public authorities’ focus on cost-effective management products for consumers underpins this position for the company.

In terms of the general environment for the business, new or extended rules are constantly being introduced, e.g., related to sustainability, anti-money laundering and terrorist financing, as well as product pricing and distribution of funds. Most legislative initiatives come from the EU's work to create a common rulebook for the EU single market, which is an ongoing effort. Further new or extended rules may therefore be expected in the coming years. The changes to the rules require modifications to processes and systems. The company is well equipped to handle these changes in a proper manner.

The company will continue to streamline its operational systems and procedures in 2023.

It is important for the company to have the skills to cope with changes in its own and its customers’ regulatory framework. The company sets great store by close relationships with its customers to enable it to offer products and financial solutions that meet their needs.

The Board believes that the company is well equipped to meet its future challenges.

There are no new and/or changed standards with material effect adopted by the company in 2022.

Fixed assets are valued at acquisition costs, adjusted for depreciation and any write-downs. An assessment of the need for write-down will be made where there is an indication of a fall in value that is anticipated to be permanent.

Current liabilities are valued at the highest of nominal and fair value. Current liabilities consist mainly of accounts payable, incurred or overdue public fees, debts to intra-group companies and other current liabilities.

The Company’s accounts are presented in NOK, which is the functional currency of the Company.

Transactions in foreign currency have been translated to NOK by using the exchange rate on the date of the transaction. Currency gains and losses on transactions in foreign currency are recognised through profit or loss. This also applies to translation of monetary items (assets and liabilities) at the end of the reporting period.

Translation differences on non-monetary items is included as a part of the assessment of fair value. Translation differences associated with non-monetary items, such as shares at fair value through profit and loss, are included as an element of value change taken to profit/loss.

An important part of the basis of pension costs and pension obligations is how mortality and disability develop amongst the members of the pension scheme.

KLP uses best estimate based on mortality and disability figures in KLPs customer base.

The costs of AFP depend on how many in each year-group take AFP. On reaching 62 years there are 42.5 per cent who retire with an AFP pension. It is only those who are employed and working right up to retirement who are entitled to AFP. This is taken into account in the calculation of the AFP obligation.

AFP/early retirement is not relevant to this scheme. In regard to mortality the same estimates have been used as for “Fellesordningen”.

The pension funds are based on KLP’s financial funds in the common portfolio. The table shows percentage placing of the pension funds administered by KLP at the end of the year. Value-adjusted return on the assets was -1,14 per cent in 2022 and 8,36 per cent in 2021.

Expected payment into benefits plans after cessation of employment for the period 1 January 2023 – 31 December 2023 is NOK 25,6 million.

The sensitivity analysis above is based on all other assumptions being unchanged. In practice that is an unlikely scenario and changes in some assumptions are correlated. The calculation of gross pension obligation and accumulation for the year in the sensitivity analysis has been done using the same method as in calculating gross pension obligation in the financial position statement.

The duration in the Joint scheme is estimated at 18,9 years.