Annual report 2021 KLP Group, Sustainability and KLP

• Solid return from the equity market
• Good return on property investments
• Low interest rates in Norway and abroad
• Volume growth and solid earnings in the subsidiaries
• Sound financial buffers

The total recognised income attributed to other profit/loss elements, before allocation between the pension customers and the company, was NOK 15.9 (13.4) billion in 2021.

The financial income from managing the pension funds in the common portfolio amounts to NOK 49.8 (24.2) billion, corresponding to a return of 8.4 per cent. Over the year, the valuation reserves increased from NOK 55.1 billion to NOK 77.4 billion. The investment result is thus NOK 15.1 (12.6) billion.

KLP aims to deliver long-term, competitive returns in the customer portfolios, and stable returns in the corporate portfolio. This is achieved by spreading funds across different investment types and geographical areas.

The investments in the common portfolio are distributed between the different categories of financial assets as shown in the table below:

Short-term bonds, loans and investments in liquidity/money markets failed to produce a return above the stated return guarantee of 2.4 per cent. Value-adjusted returns including securities held to maturity were 6.7 per cent, well above the guaranteed return.

The risk result is an expression of how mortality and disability have developed in the insured population in relation to the assumptions used in the annual setting of premiums.

The ordinary risk result for 2021 was NOK 589 million. Of this, the disability result was NOK 141 million, the result for longevity risk was NOK 342 million and for death and survivors’ benefits NOK 106 million. However, the recognised risk result shows a deficit of NOK 721 million. This amount includes the use of NOK 1,311 million from the risk equalisation fund to strengthen the premium reserves to cater for increased life expectancy.

KLP achieved an administration result of NOK 35 million in 2021, a reduction of NOK 136 million from the previous year. The decrease is mainly due to increased insurance-related administration costs, mainly from increased depreciation in the IT area.

KLP has economies of scale as a result of its high market share in public-sector occupational pensions, and can thus continue to provide good service at competitive prices.

The corporate portfolio, which is invested in bonds, property, shares in subsidiaries and other strategic equity investments, achieved a return of 3.4 (3.1) per cent in 2021. Returns from real estate investments and fixed-income bonds are the main contributors to this.

Public-sector occupational pensions are the Group’s core product and are provided by the parent company, KLP. The company has maintained its leading position in this market through 2021. Of the Group’s total assets of NOK 901.3 billion, customers’ pension savings account for NOK 661.5 billion.

Competitive tendering in the public-sector occupational pensions market has picked up somewhat in recent years, but even now, few customers are choosing to move their pension schemes. Customers can choose to set up their own pension fund or go to other providers. Only two municipalities chose a different provider after putting their pension schemes out to tender in 2021. In the corporate market, only 10 out of 80 customers in process chose to terminate their pension agreement with KLP after this year’s tendering procedures. KLP har over 2000 corporate customers. There are still relatively few customers who have chosen to switch from public-sector occupational pensions to other pension schemes, and KLP is maintaining its position in the corporate market too.

In February 2022, the Norwegian Competition Authority carried out unannounced securing of evidence with the groups’ insurance operations (KLP) because they believe there is reasonable reason to assume that KLP may have violated the Norwegian Competition Act. It is the provision in section 11 of the Norwegian Competition Act on undue exploitation of a dominant position that the Norwegian Competition Authority investigates whether KLP may have breached, and the securing of evidence was carried out on the basis of a decision from Hordaland District Court.

KLP has given the Norwegian Competition Authority access to everything they have requested and is prepared to cooperate with the Norwegian Competition Authority in the further investigation.

Premium reserve for customers that moved from KLP by year end with settlements in 2022 was around NOK 3.4 billion, or 0.7 per cent, in 2021.

The rules governing such moves are changing from 1 January 2022. Earlier rules on the securities adjustment fund and supplementary reserves have been replaced with a buffer fund covering all customers. KLP has argued for these changes, and believes that they will provide a more equal basis for competition. The change in the regulations affects the amount of capital customers can release when they move their pension scheme from one company to another. New regulations now remove the possibility of a migrating customer freeing up capital at the expense of the insured population in the company it is moving to.

Good financial strength, solid results, low costs over time and high customer satisfaction put KLP in a good position to face competition in the public-sector occupational pensions market going forward.

Almost all operational and management tasks were handled through digital channels as the coronavirus pandemic continued into 2021. KLP has developed good solutions for digital services, and most customer follow-up, meetings and training activities took place via digital channels.

At the end of 2021, 288,183 pensioners were drawing a pension from KLP, and we expect to see a significant increase in the number of pensioners in the years ahead. This comes as a result of growth in employment in the public sector, which will in turn lead to an increase in the year-groups taking their pensions in the future.

Timeliness and quality in individual pension processing are among KLP’s top priorities. In relation to this, the company has initiated an extensive change programme, which represents an historic upgrade in system solutions within the pension area. Through this programme, KLP aims to upgrade IT systems and automate work processes to strengthen its future competitiveness, through good and relevant service, market-leading pension guidance, and lower costs.

This work makes big demands on many areas of the company, and has unfortunately led to slightly longer response times than our customers and members normally experience. Additional resources have been put in place in the affected areas to maintain good service levels right to the end of this major development project.

2021 was a profitable year and the company’s financial strength is good. Financial returns, insurance operations and operating costs were all better than expected. The company’s goal is to contribute to better non-life insurance products at low prices for KLP’s owners and their employees. The company is a major provider of insurance to this market, comprising companies with public-sector affiliation and members of the Group’s pension schemes. KLP Skadeforsikring is the market leader in the public-sector market, with a market share of 36.9 per cent.

The pre-tax profit for the year was NOK 397.7 (220.0) million. The insurance result (premiums minus claims paid) for events occurring in 2021 was NOK 426 million, up from NOK 276 million in 2020. The improvement in profits is due to a general price adjustment and the fact that the company was not exposed to the same number of large claims as in 2020. The company received two claims over NOK 25 million in 2021. The total accounting effect for the company from these two claims is NOK 84 million. The largest claim, a fire in a waste processing plant, is estimated at NOK 221 million, which makes it the biggest in the company’s history. A total of 13 claims were reported in the range between NOK 5 and 25 million. These represent total payments of NOK 119 (190) million.

2021 was also affected by the coronavirus situation. The company expects to see reduced activity in some insurance segments, particularly motor insurance, but the economic impact is difficult to determine. Travel generally picked up in Norway in 2021 compared to 2020, but the claims costs related to leisure and travel insurance are still lower than normal.

During 2021, the company received 352 claims arising from Covid-related occupational illness. Only a few of these are expected to result in payments. There is currently considerable uncertainty as to the effect the pandemic will have on this type of insurance. Claims submitted as a result of adverse reactions to Covid vaccinations are handled by the Norwegian Drug Liability Insurance Pool.

Payments for claims filed earlier decreased by NOK 109 million for all segments combined, corresponding to 5.5 per cent of the provisions at the beginning of 2021. The largest settlements are still related to occupational injuries, but reserves have also been also reduced within property insurance, mainly because of pay-outs on older claims.

The company’s total claims ratio fell in 2021 to 76.4 per cent overall. If we disregard reserve adjustments to claims occurring before 2021, the claims ratio was 83.1 per cent: 92.7 per cent for the public sector/corporate market and 70.7 per cent for the retail market.

The financial markets were generally in good shape in 2021. The total return on assets managed was 5.0 (5.0) per cent. The equity portfolio had only two months of negative returns and produced a return of 24.6 per cent for the whole year. General interest rates rose somewhat during the year, and the return on interest-bearing assets was therefore weak. Fixed-income investments in the short and long-term portfolios produced returns of 1.0 and 3.2 per cent respectively. The company has two property investments. Values increased through 2021, and the real estate portfolio was written up by NOK 43 million. The portfolio generated an annual return of 10,5 per cent.

The company’s cost ratio has been decreasing over several years and stood at 15.8 (17.6) per cent in 2021. This is on a par with the market as a whole.

The company meets all regulatory requirements by a good margin. The solvency margin was 224 (237) per cent at the end of 2021. The company has defined a long-term target for its solvency margin of at least 200 percent.

KLP’s banking business is handled by the KLP Banken group, which comprises KLP Banken AS, KLP Kommunekreditt AS and KLP Boligkreditt AS, with KLP Banken AS as the parent company. Through its banking business, KLP offers mortgages and other banking services to municipal and county authorities and companies working for the public sector. KLP’s banking activities can also look back on good results in 2021.

KLP Banken is intended to be a direct bank for customers seeking a long-term and predictable partner. This is how the bank aims to be the preferred bank for retail customers who are members of KLP’s pension schemes and find the bank’s services and values attractive.

The Bank aims to provide products and services on competitive terms, to help companies that have chosen KLP as their pension provider to be viewed as attractive employers.

KLP Banken’s presence in the market for loans to the public sector encourages competition and benefits the target group of municipal and county authorities and enterprises related to the public sector by providing access to favourable long-term financing. The bank provides guidance to customers in financing and municipal finances. The bank also manages lending for KLP’s common portfolio.

At the end of 2021, the banking group’s total lending amounted to NOK 117.7 billion, an increase of NOK 2.6 billion for the year. Of the outstanding loans, NOK 39.9 billion was financed by the banking group and the remainder by KLP. The lending was split between NOK 25.0 billion in mortgages to private individuals and NOK 92.7 billion in loans to public-sector enterprises.

The banking group manages mortgages on its own account in KLP Banken AS and through KLP Boligkreditt AS. It also manages mortgages for KLP. In 2021, the bank paid out NOK 9.9 (9.7) billion in new mortgages. In line with the owners’ wishes, the company focuses on offering favourable terms to young employees in the municipalities. The mortgage portfolios taken together had a growth of NOK 1.3 (2.0) billion in 2021.

KLP Banken AS offers credit cards to retail customers as part of its retail banking service. At the end of 2021, drawn credit amounted to NOK 43.0 (49.2) million, spread across 9,800 (9,200) card users. The introduction of a debt register, and the coronavirus pandemic, have contributed to a general reduction in consumer debt.

Through 2021, total deposit volumes from retail customers increased from NOK 10.5 billion to NOK 11.6 billion. Deposit growth is therefore higher than the year before, which is mainly attributable to stable interest terms. The number of active deposit customers in the retail market is almost 45,000, of whom 69 per cent are members of the pension schemes.

KLP Banken AS also offers deposit products to municipalities and businesses. At the end of 2021, deposits from this group came to NOK 1.3 (1.3) billion, which is 10 (11) per cent of total deposits. The bank’s total deposits increased from NOK 11.8 billion to NOK 12.9 billion in 2021.

The KLP Group’s lending to the public sector is also managed by KLP Banken AS. On the banking group’s own account, loans to public borrowers are registered in the subsidiary KLP Kommunekreditt AS. KLP Banken AS also enters into loan agreements for the public sector on behalf of KLP. Total loans to public-sector borrowers stood at NOK 84.5 (80.4) billion at the end of 2021, an annual growth of NOK 3.7 (8.2) billion. Of this, lending for own account amounted to NOK 17.8 (17.6) billion. New loans amounting to NOK 11.2 (15.3) billion were paid out in 2021 to the public sector by companies within the KLP Group.

The KLP Banken Group result before tax and other comprehensive income was NOK 116.1 (136.8) million. Of this, NOK 87.6 (101.6) million came from the retail market and NOK 28.5 (35.2) million from the public sector. The return on the bank’s equity was 4.8 (6.2) per cent before tax.

KLP Banken opted to keep mortgage rates unchanged after the central bank interest rate increased in September 2021. Higher borrowing costs thus resulted in lower net interest income towards the end of the year compared to earlier in 2021. Nevertheless, strong growth in the volume of mortgages has helped to keep net interest income in the retail market at roughly the same level as last year in this segment. In the public-sector market, net interest income was on a par with a normal year, and hence lower than in 2020.

The banking group’s current capital requirements including capital buffers are 16.0 per cent capital adequacy. The requirement includes a Pillar 2 supplement of 1.5 per cent. We also maintain a buffer of at least 0.5 per cent of the actual capital requirement for Pillar 1 and Pillar 2 risks, so the bank’s capital target is 16.5 per cent. At the end of 2021, capital adequacy was 18.7 (19.5) per cent.

KLP is pleased with developments in KLP Kapitalforvaltning AS. KLP Kapitalforvaltning AS is the Group’s asset management operation within securities and fund management. It had a total of NOK 669 billion under management at the end of 2021. The majority of the assets are managed on behalf of KLP and the subsidiaries in the KLP Group. KLP Kapitalforvaltning AS also offers fund products to members and other external investors.

Assets under management increased by NOK 73 billion in 2021. Net new subscriptions to KLP’s securities funds from investors external to the Group and retail customers amounted to NOK 13.3 billion. KLP Kapitalforvaltning AS manages a total of NOK 136.8 billion for customers outside KLP.

One new mutual fund was established during 2021, so the company was managing 56 mutual funds at the end of the year. The new fund is Nordic Swan certified, which means that it has to satisfy strict requirements with respect to corporate social responsibility. The Nordic Swan-labelled funds were popular in 2021, with a similar return to comparable index funds.

KLP Kapitalforvaltning AS made a profit before tax of NOK 56.2 (30.9) million in 2021.

KLP Eiendom AS is maintaining a positive growth in property management for KLP. All management and development of the KLP Group’s own properties is handled through the wholly owned subsidiary KLP Eiendom AS. The company is one of Scandinavia’s largest property managers, and has operations in Norway, Sweden, Denmark, Luxembourg and the United Kingdom. The KLP Group’s properties have good locations, a high standard of building, and efficient space utilisation. The property company prizes energy-saving and the environment and is environmentally certified in accordance with ISO 14001 in Norway, Sweden and Denmark.

The property portfolio has grown substantially in recent years, and accounts for 13.8 per cent of the collective assets. Investments in property have contributed good returns.

With the coronavirus pandemic, the 2021 property year was again challenging for hotels and city centre trade. This has weakened the ongoing results from these business areas. The office rental market in Oslo and Trondheim has shown positive growth and Stockholm has seen a rapid improvement after the initial phase of the pandemic, while Copenhagen is still sluggish. The expected returns from attractive office buildings have been low, and this has contributed to a positive growth in value.

Property management is carried out only on behalf of the companies within the Group and has thus primarily contributed to returns on invested capital for the life insurance customers. Operating profit from property, including shares in external real estate funds, for the common portfolio of public-sector occupational pensions was 10.2 per cent.

KLP Forsikringsservice AS provides insurance-related services to municipal and county council pension funds, including appointed actuary services. These services are based on the expertise and systems developed for KLP’s pension business.

KLP Forsikringsservice AS has an agreement for a wide range of services including member and pension administration.

Monitoring and management of risk is a prerequisite for good wealth creation and security for pension assets. Identification, assessment and management of the risk factors, both to insurance and to financial management, are therefore key aspects of KLP’s business. The risk profile is monitored within the individual operational entities and is assessed both by company and combined at Group level.

KLP carries out an annual ‘Own Risk and Solvency Assessment’ (ORSA). The self-assessment conducted in 2021 concluded that the company’s risk management and solvency were consistently good in all areas. The control functions for risk management and the actuarial functions are part of the Risk Management and Control section.

KLP’s principal activity is public-sector occupational pension provision. This industry is characterised by predictability and, to a limited degree, by individual events that may affect results significantly. Developments in the incidence of disability and life expectancy affect the risk profile.

KLP uses the K2013 mortality assumptions (tariffs). These were in line with observed mortality rates in the insured population up to and including 2009, as well as the expected future increase in longevity based on Statistics Norway’s projections. In recent years, Statistics Norway has updated its expectations for life expectancy. From 2021, KLP has strengthened its assumptions about longevity for men.

KLP uses even stronger assumptions on longevity in the pension scheme for nurses and the pension scheme for hospital doctors because the people insured in these schemes have greater observed longevity than other groups. The margins in the longevity assumptions are considered to be satisfactory.

New disability tariffs were introduced from 1 January 2021, in line with updated risk history.

In the field of non-life insurance, the pricing of insurance risks is based on historical claims information, the risk of major claims and reinsurance costs. The company has a large proportion of long-tail business, a factor which, together with a large proportion of business exposed to large claims, contributes to a higher insurance risk than the market generally. This is reflected in a high solvency capital requirement. In order to mitigate this risk, further growth is sought within the retail market and the small-and medium-sized business market. Over time, this will have a stabilising effect on risk and results.

The reinsurance programme limits the company’s own expense per claim event.

KLP guarantees an annual minimum return on the management of its customers’ pension assets linked to public-sector occupational pensions. To provide this guarantee, KLP charges an interest guarantee premium. The interest guarantee premium is priced on the basis of KLP’s solvency, the investment risk that KLP assumes, and the general trend in interest rates. The interest guarantee premium is priced anew each year, which helps to limit the risk associated with the return guarantee. With the good financial strength built up in KLP, the interest guarantee premium can still be kept low even if interest rates are low compared to the annual return guarantee.

Each year KLP works out a strategy for how the pension assets are to be invested. The investment strategy emphasises exploitation of the company’s risk-bearing ability within a framework that dictates stability and the long-term view in asset management. Limits are defined for various financial risks such as credit risk, counterparty exposure, foreign exchange risk, use of derivatives and liquidity risk. A credit policy is also laid down for the Group, and credit limits for total exposure to individual counterparties are set by the Group’s Credit Committee.

The financial risk is continuously monitored to ensure the risk is matched to the risk capability within the limits set in the investment strategy. With low interest rates, the priority is to maintain the company’s ability to bear financial risk over time.

The responsibility for operational risk management and asset allocation lies with a separate organisational unit under the Finance division. This unit directs KLP’s management strategy through mandates and ensures that asset management is within limits set by the Board of Directors. An independent control unit, the Risk Management and Control unit, headed by the CRO (Chief Risk Officer) is responsible for monitoring and reporting whether the management of the company’s assets is being conducted within the limits set, applicable mandates and guidelines provided by the Board.

KLP has good liquidity, with substantial holdings of liquid securities that can be realised at short notice. Quarterly payments from customers provide for regular replenishment of liquidity through the year. The payments are intended to cover commitments that only fall due several years into the future. The true liquidity position thus amounts to more than the balance on the current account, which is the definition of cash and cash equivalents in the cash flow statement.

KLP’s operational risks are associated with undesirable events resulting from failures in internal working processes, employee error, dishonest acts and criminality or external events. All processes along the value chain are exposed to various types of operational risk. KLP has developed procedures for identifying, monitoring and taking necessary measures to reduce the risk of undesirable events. It is a general management responsibility at all levels to identify and follow up those deviations that occur.

Group senior management carries out an annual examination of significant operational risks in the business and these are delegated with ownership to an operational manager in the Group senior management team. The Board of Directors annually reviews the risk assessments and documentation on management and control measures established together with a total risk overview. Procedures have been established for independent controls and reporting at various levels. Tasks and functions are distributed so that conflicts of interest are avoided, and responsibilities made clear.

The company’s independent Internal Audit function carries out assessments of actuarial, financial and operational risks. Following consultation with the Board and Group senior management, assessment and testing are conducted in areas that are material and exposed to risk in the interests of satisfactory management and control. The result, with any recommendations on necessary measures to be taken, is presented to Group senior management and the Board and is followed up. This is further described in KLP’s annual report in the section on ‘Risk management and internal control’.

The Compliance function in KLP assists Group senior management, the Board and the company’s employees in ensuring compliance with regulations and ethical standards. The head of the function reports to the CEO and its reports are discussed by the Board. The function takes a preventive approach through advice, implementation and culture-building, and carries out control activities to maintain a good compliance culture. A more detailed description of the company’s adherence to good corporate governance is given in the annual report, in the section on NUES and in the description of risk management and internal control in KLP.

KLP’s work on compliance with laws and regulations is closely linked to its work on ethics and corporate social responsibility. The Group’s ethical guidelines were revised in 2021 to set out principles for ethical behaviour within KLP. The principles of behaviour are rooted in KLP’s values and support a culture of compliance characterised by accountability, openness, clarity and engagement.

Because of the pandemic, no physical Local Government Conference was held in 2021. Instead, the Local Government Conference took the form of a journey round the country with seven digital conference broadcasts from Trondheim, Bergen, Bodø, Ålesund, Arendal, Tromsø and Lillehammer. The aim was to create knowledge and inspiration forums for the benefit of owners and customers in the tough times we are living through, and to tackle the major challenges that lie ahead. Audience figures for the broadcasts were high and increased through the year. The last broadcast from Lillehammer in December attracted 1,300 viewers. Many people are also watching recordings of the broadcasts. The broadcast from Tromsø in November about the turbulence in electricity prices has been viewed over 5,000 times since then.

KLP has been running extensive courses and seminars for many years, particularly related to training in pensions but also in other subject-areas such as claim prevention, HSE/working life and aspects of finance and corporate social responsibility. After the Covid lockdown from March 2020, courses and conference activities were digitised. This change has produced clear gains for KLP and for its customers. There has been less travel, but the company has reached out further, with significantly more people attending each course and more courses and conferences overall. KLP’s customer satisfaction survey 2021 shows that public-sector occupational pension customers are more satisfied with the information they receive about their pensions now than before the pandemic. A good 30 per cent of those surveyed in the municipalities and 26 per cent in the health trusts report that they have attended courses and conferences organised by KLP in the past year.

KLP has strengthened its digital offering through 2021, with the aim of making it easier and more attractive to be a customer and/or member of KLP. For example, KLP has developed the Pension Guide, which employers can use in a recruitment process to simplify and clearly present the benefits of the pension arrangements available to candidates in their new job. Another example is an interactive map showing how the pension money is invested locally and thus helps to develop Norway. The company is constantly working to develop KLP’s digital customer interfaces to make them more user-friendly. The company had 6.5 million visits to klp.no. This represents a growth of 11 per cent compared to 2020.

KLP increased its visibility as a pension expert in the media in 2021, and received more press coverage around corporate social responsibility, particularly on the subject of responsible investments. The Group has continued to prioritise efforts to improve customer communication in 2021. The results of systematic evaluation and measurement and targeted training measures show great improvement, and communication from KLP is of increasingly consistent high quality.

2021 was the first year KLP produced only digital annual reports. This solution made production much easier, far cheaper, and of course more environmentally friendly.

The internal news pages in KLP are one of the most important places for information sharing in the Group, with a very wide readership. Each employee read an average of 200 internal news stories last year. KLP was concerned to preserve the sense of solidarity while employees were working from home, and so concentrated on having current news stories from all the business areas in KLP.

KLP still has very satisfied customers. Among public-sector customers, KLP achieved the highest measured result ever for public-sector occupational pensions. Eight out of ten areas surveyed achieved the objectives in the group strategy. Personal attention and contact quality are still KLP’s biggest strengths. For the corporate market in non-life insurance, KLP is at the top of the EPSI industry survey for the eleventh year in a row.

KLP’s strategic goals call for aggressive business and technological development. KLP aims to streamline the business and to provide good digital services for employers and members based on new and existing technology. Important initiatives within the comprehensive digitalisation programme are increased automation and self-service with the establishment of a new pension platform, as well as new cloud-based solutions for digital customer service and data warehouse provision.

The digitalisation programme runs over five years, and the company is now more than halfway to establishing a new pension platform and has made important deliveries towards automated solutions related to old-age pensions. In the remaining work up to 2024, self-service and case handing solutions for other types of pension benefit will be put in place. In parallel with this, a comprehensive transition to more cloud-based services is underway within KLP. This includes the new pension platform, a new data warehouse, and modernised CRM and digital interfaces. Work is also underway to meet regulatory requirements, such as the new accounting standard for insurance contracts, IFRS 17.

Information security is an increasingly challenging and demanding area to deal with. KLP is constantly acting to reduce operational risk. The company takes a strategic approach to security based on an internationally recognised framework and works systematically to raise security levels in solutions and infrastructure. It is also strengthening its processes and organisational awareness of external threats. KLP has built up a strong security environment in recent years, and this expertise is shared with the company’s customers.

2021 was a “climate year” in many ways. The International Panel on Climate Change (IPCC) determined once and for all that climate change is man-made, and the world has seen several frightening examples of the change unfolding, with more floods, extreme weather, wildfires and record temperatures. At the same time, there were glimmers of light from the climate summit in Glasgow, and the net zero movement in the finance industry picked up speed. KLP is part of this movement.

In 2021, KLP set a net zero target for investments. KLP has developed its own roadmap based on internationally established standards and best practice. The roadmap describes how KLP will work towards and measure the company’s contribution to achieving the targets set out in the Paris Agreement, and how KLP will assess every investment against an emission path that is compatible with the 1.5-degree target. This means that KLP will increase climate-friendly investments, set targets and strategies for the company’s investments in high-emission sectors, and work to reduce emissions across the portfolio.

An important part of the climate target is to increase climate-friendly investments that contribute to a faster transition to a low-emission society. Among other things, the world needs more renewable energy, enhanced infrastructure and new technology to address the global challenges. The same is true in Norway, where this is also essential to achieving a sustainable transition. In 2021, KLP continued to increase its climate-friendly investments in renewable energy, a global climate fund and investment cooperation for sustainable infrastructure, through start-ups and seed corn funds.

If we are to reach our climate targets, we need to restructure the whole economy. Several sectors with high emissions need to adopt new technology and business models to reduce their emissions and adapt to new regulations that will take us to a low-emission society. Together with DNB and the Green Shipping Programme, KLP has carried out an analysis of climate risk in the shipping industry. The report looks at how climate policy and energy prices will impact profitability in the maritime sector.

The previous year also highlighted the crisis in nature. The importance of environmental and biodiversity loss and what it means for people’s livelihoods needs to move up the business and political agenda. KLP signed the finance industry’s call for protection of nature and biodiversity (the Finance for Biodiversity Pledge) and will work together with other investors through this.

Climate change and weather events are becoming increasingly important from an insurance perspective. KLP has therefore worked to identify climate risk and how it will affect the insurance business going forward. In Norway, the municipalities play a key role in achieving the climate targets, and they are also exposed to climate risk. As a pension provider and non-life insurance company, the KLP Group will continue to work on how best to assist its owners in preventing and managing climate risk.

KLP has been working on sustainability and responsible investments for decades. There is a series of bills and regulations to ensure that the EU achieves its climate target of cutting emissions by at least 55 per cent by 2030. The EU taxonomy, which defines what may be called sustainable activities, is key to this, and it is supported by the other regulations. KLP has followed developments from the EU closely and has prepared the company for future demands. KLP welcomes the legal requirements that are on the way, which will hopefully help to ensure that KLP is provided with better information about sustainability from companies that it invests in.

KLP has actively followed up on companies through the year, keeping a special eye on those with operations in the occupied Palestinian territories and in Myanmar. Following in-depth reviews, KLP decided in July to exclude 16 companies with ties to Israeli settlements in the West Bank. This came after the UN High Commissioner for Human Rights published a list of companies with activities linked to the Israeli settlements in the occupied Palestinian territories. These settlements are seen as a breach of international law, and KLP believes that there is an unacceptable risk that the excluded companies could be contributing to violations of human rights in war and conflict situations through their affiliation with the Israeli settlements in the occupied West Bank.

KLP and the KLP funds decided on 28 February of 2022 to freeze all investments in Russia. This means that 22 Russian companies will be excluded. KLP will work to sell all of its investments, which amount to around NOK 350 million.

KLP also tightened the weapons criterion in the ‘Guidelines as a responsible investor’. In January 2021, the United Nations Treaty Prohibiting Nuclear Weapons entered into force. The Government Pension Fund Global (SPU) revised its guidelines accordingly. To back up the intent of the Treaty, KLP wanted to apply a more stringent practice to undertakings involved with nuclear weapons. KLP has traditionally excluded companies that produce or develop key components for controversial weapons, and the Company has now settled on a somewhat stricter line for what components or support services should be included.

The need for skilled professionals in the local government and health sectors is growing with an ageing population in increasing need of care. At the same time, figures from KLP show that the proportion of people drawing disability pensions in the local government sector is as high as 10 per cent, and that the average job ratio is just over 70 per cent. If retirement trends continue, a 50-year-old in the local government sector can expect to work until they are just over 70 years old.

So, it is important for employees in the local government and health sectors to work as much as possible for as many years as possible while they are of working age. KLP aims to assist in this, through its working environment network, for example. This is a meeting place for projects in municipalities, health trusts and companies working on working environment issues. Andøy municipality is an example of a customer which has participated in KLP’s working environment network with a project to reduce sickness absence in the municipality. This has produced good results. Since the project was completed, some departments have reduced sickness absence by 30 per cent over a year. For all departments combined, sickness absence decreased by 15 per cent. KLP sees it as important to use such networks to help increase competence and insight into measures that can improve the working environment, reduce sickness absence and prevent disability.

The contribution of KLP’s employees is the most important input factor for us to achieve our goals. The health, safety and well-being of the employees is important if injuries and undesirable effects are to be avoided. The aim is to facilitate a good physical and psychosocial working environment characterised by job satisfaction. These are important prerequisites for good quality work, better results for the business, greater competitiveness, customer confidence and individual enthusiasm for work. No serious occupational accidents were reported in 2021.

KLP has a target to keep sickness absence below 4.0 per cent. Absence through sickness in 2021 totalled 3.34 per cent, which means that we have reached the target for the third year in a row. Like many other businesses, KLP has also seen lower levels of sickness absence during the coronavirus pandemic. A lot of the work and discussions within KLP have been about how to prevent illness and health issues resulting from working from home. A number of measures have been taken to contribute to the best possible physical and psycho-social working environment. There has also been a focus on providing managers with the expertise and support to take good care of their employees through these unusual times.

In all, 6.4 per cent of our employees left the company in 2021, an increase of 2.6 per cent from 2020.

The employee survey for 2021 shows that KLP still scores high on job satisfaction and commitment. Webinars have been given for managers and employees to raise awareness of what is needed to create a good working environment at a time when we have been working from home. Additional measures have been implemented for employees under the age of 30, who are the group that scores lowest on job satisfaction.

KLP wants to be an attractive workplace where all employees feel that they are respected for who they are, regardless of gender, ethnicity, religion, beliefs, disability, sexual orientation, gender identity, gender expression, age and other vital attributes. More detailed information on Gender Equality and Diversity can be found in KLP’s Sustainability Accounts for 2021, in the section on ‘KLP as a workplace and employer’.

KLP aims to achieve a gender balance in management positions and other responsible roles, because a balanced composition is good in itself and because this will gradually help towards a better pay balance between women and men. The average at all management levels in 2021 is 38 per cent women and 62 per cent men, and there is different distribution at the different management levels. In more responsible professional roles, KLP has 27 per cent women. KLP has initiated several measures in this area. Among other things, these measures are related to participation in the charter ‘Women in Finance’, the main purpose of which is to increase the proportion of women in management positions in the finance industry in Norway, and to enhance recruitment processes, management development, and talent identification and development. KLP aims to achieve a pay balance and has a clear equal pay perspective in payroll processes to ensure that there are no pay differences that cannot be justified.

KLP also intends to step up efforts to increase the proportion of workers with disabilities, and started planning for this in 2021. KLP works with FRI (the National Association for Lesbians, Gays, Bisexuals and Transgender People) to run the course on ‘Pink Competence’. The aim is to give staff and managers good advice and ideas on how to talk confidently about sexual orientation and gender expression in the workplace. KLP aims to be an inclusive workplace where people can be themselves. KLP is also a member of the Network for LGBT people (the collective term for lesbian/gay/bisexual/transgender persons) in the workplace, which consists of employers who wish to engage with this issue related to working life. KLP aims to increase the retirement age and provide development opportunities for employees in the older age group.

The induction programme for new employees takes them through KLP’s core values, ethical guidelines and policy for equal opportunities and diversity.

KLP’s aim is to offer its employees good, market-matching salary and employment terms and conditions. The subsidiary KLP Kapitalforvaltning AS operates in markets where part of the salary is based on profits achieved and therefore offers salaries that are partly performance-based to employees who have direct responsibility for profits. In accordance with the regulations, payment of this remuneration is spread over several years and is partly linked to the growth in value in selected securities funds, because KLP as a mutual company does not have its own exchange-listed equity instruments. Performance-related pay has not been introduced elsewhere in the Group.

KLP’s impact on the external environment and climate comes directly from its own activities, indirectly through partners and suppliers, and through investments in companies and property. KLP has a responsibility to reduce this impact. At the same time, climate change and damage to nature and the environment could affect KLP’s ability to generate a good return on pension savings in the longer term. In 2021, KLP produced an updated environmental policy which sets out how the company intends to work to reduce its impact on the environment and climate and commits KLP to set clear and ambitious environmental goals for the business. As regards the company’s own operations, KLP’s overall goal is to halve greenhouse gas emissions from 2010 levels by 2030. KLP is well placed to meet this reduction target. This is described in more detail in the Sustainability Report.

The public-sector pension schemes are anchored partly in law and partly in collective agreements between the employer and employee organisations. Extensive changes were made to public-sector occupational pensions from 1 January 2020. The objective of the changes was to give better support during working life and provide for greater mobility between the public and private sectors.

New rules on retirement pensions for members with special age limits are still pending. This also applies to the AFP system, which is changing in 2025 from an early retirement scheme to a lifetime pension benefit, following the pattern from the private sector.

Cecilie Daae, Vibeke Heldal and Erling Bendiksen joined as new Board members in 2021. Egil Matsen came in as regularly attending board member from November 2021.

KLP sets great store by good and close dialogue with its owners. This provides the company with important input on strategic questions and useful feedback on day-to-day operations. Owner meetings were held at the county level in 2021 too, and we also attended executive meetings in the health trusts. Six-monthly resource group meetings were also held for local authority chief executives and municipal directors, as well as resource group meetings for politicians. The company also had occasion to provide a status report from KLP for several municipal councils and executive committees.

KLP’s articles of association and applicable legislation provide guidelines for corporate governance and management and define a clear division of roles between governing bodies and executive management. The Board of Directors of KLP carries out an annual review of corporate governance (NUES). As KLP has not issued any equity instruments and so is not exchange-traded, there will be some differences from the Norwegian Code of Practice for Corporate Governance (NUES) as set out in a separate section of the annual report. Election procedures for the corporate assembly are tailored to the direct form of ownership with important stakeholder groups having assured representation on the corporate assembly, in accordance with the company’s Articles of Association.

The Board of Directors has established an Audit Committee, a Remuneration Committee and a Risk Committee. The Board undertakes an annual assessment of its own business and competence. Directors’ liability insurance has also been taken out for Board members and the general manager of KLP. The insurance covers the insured’s liability for loss of assets for claims made against the insured during the insurance period as a result of a liability-related act or omission on the part of the insured in his capacity as general manager or board member. The insurance is taken out with an external company.

The company’s vision is for KLP to be the best partner for the days to come. This shows that we take a long-term view in order to create value for our customers. KLP’s principal product is public-sector occupational pension provision. We set out to provide public-sector enterprises and their employees with secure pension saving that contributes to sustainable development. Everything the company does within the Group is intended to help ensure that it pays to have your pension scheme with KLP. As part of the company’s service, KLP also offers important and necessary additional services to our customers and members, such as banking and insurance. The subsidiaries should strengthen the competitiveness of the core business by contributing to good investment management, strengthening relations with customers with public-sector occupational pensions, enhancing the reputation of the group, and producing satisfactory returns on the life company’s equity.

KLP aims be a pension provider which differentiates itself from other companies operating in the same markets. KLP’s mutual status provides the best starting point for ensuring that any value added will benefit customers, who are also our owners. When the company runs at a profit, this is used to lower premiums or boost financial strength or passed on to customers in the form of lower costs. The result is reduced payments to KLP. This leaves more money for schools and hospitals, or other priority tasks that our customers are responsible for. The way in which KLP runs its business therefore has a direct impact on how they discharge their social obligations. In short: “All wealth creation should accrue to the customers. Our job is to deliver the best possible services at the lowest possible price.”

Public-sector employers can choose between buying public-sector occupational pension provision from a life insurance company or establishing a pension fund. Today, KLP and one other life insurance company are competing to deliver public-sector occupational pensions. There are also 21 municipal and county pension funds and Oslo Pensjonsforsikring. The public-sector occupational pension product is regulated through the Basic Collective Agreement between the social partners. Essential elements of the product content and prices are therefore subject to regulations that are common to all providers. This means that all wealth creation benefits customers. KLP therefore take a long-term view and puts the interests of its customers first.

KLP’s main goal is to be Norway’s leading provider of pensions to the public sector. KLP aims to deliver secure and competitive pension, financial and insurance services to the public sector, enterprises associated with it, and their employees. KLP’s most important task is therefore to provide pensions with a competitive rate of return over time, the lowest costs and a high level of service. KLP is the pension company for the Norwegian local government and healthcare sector – a profitable community.

Managing large assets on behalf of the community carries an obligation. KLP’s management of savings is very important to the company’s customers and owners, but also indirectly to many more people in Norway and abroad. By making capital available, KLP enables companies to grow and create new products and jobs. With this comes increased social responsibility. KLP has committed owners who provide clear direction for how KLP should use the capital responsibly in its investments. Corporate social responsibility is on the agenda for the company every day and in every part of the business.

KLP is a knowledge company with more than 1,000 employees. KLP can and should become more visible as a pension expert so the company’s broad expertise can also benefit others. Pensions have been an increasingly important topic in the media and in the general public debate in recent years. As an expert in this area, KLP will work actively to improve access to knowledge and expertise on pensions and savings. KLP aims to be perceived as a credible and skilled pension adviser – the company’s goal is to be the best.

KLP aims to continue providing public-sector occupational pensions and financial and insurance services to public-sector customers and their employees. The services should be secure and competitive. With good financial strength, profitability and low costs, KLP is well positioned to further develop the business in a way that will continue to create good long-term value for customers, owners and their employees.