Annual Report 2023KLP Group, Sustainability Report and KLP

New and amended standards and interpretations which came into effect in 2023 

IFRS 17 Insurance Contracts entered into force for the fiscal year that started on 1 January 2023. However, this standard is not allowed to be applied to the company accounts, so it is not used in these financial statements. IFRS 4, which the Company has used until now, has been withdrawn and the company applies the rules in the Annual Accounting Regulations to account for insurance contracts. This has not led to any change in accounting practice.  

The Company has started using IFRS 9 Financial Instruments in 2023.  

• IFRS 9 Financial Instruments  

IFRS 9 Financial Instruments was adopted by the Company from 1 January 2023. The standard covers the recognition, classification, measurement and derecognition of financial assets and liabilities. The standard also introduces new rules for hedge accounting and a new impairment model for financial assets. IFRS 9 has been implemented prospectively, i.e. comparative figures for previous periods have not been reworked. No significant changes in transitional effects have been found since then. 

• IAS 12 has been amended to make it clear that global minimum tax (top-up tax, Pillar Two tax) is covered by the accounting standard. However, the effect of this tax on deferred tax does not yet have to be recognised or disclosed. Although this is a mandatory exception, it must be stated that it has been applied. Tax payable must be accrued in the same way as other tax payable and the amount disclosed separately. In the period from the time the tax is adopted until it is actually imposed, there are separate disclosure requirements. 

Top-up tax has been introduced in Norway from the fiscal year 2024. The regulations are complex, and it is unclear whether KLP is covered by the rules. Work is in hand to clarify this. It is therefore impossible to give an estimate of the effects the top–up tax will have on the accounts.   

The insurance contracts for public-sector occupational pensions contain derivatives in the form of a guaranteed return and investment components to be repaid to policyholders. These components must not be separated but have to be measured together with the insurance contract.  

The insurance contracts for public-sector occupational pensions contain several types of cover with different levels of underwriting risk:  

• Retirement pension 
• Survivors’ pension 
• Disability pension 

These types of cover are contracted with the same policyholder, at the same time, and are only offered together as a package. There are no requirements for separation of the different types, and they are treated as a single insurance contract.   

The insurance contracts are recognised at the time the coverage period starts.  

The Annual Accounts Regulation for Life Insurance Companies stipulates that the capital behind an insurance contract must be recognised as an insurance liability. The insurance capital for KLP’s insurance product, public-sector occupational pensions, consists of the premium reserve, buffer fund, premium fund and buffer provision for pension schemes with a multi-year guaranteed return. The insurance liabilities must be measured in accordance with the Norwegian Insurance Companies Act and associated regulations. 

The insurance contracts are renewed each year unless the customer chooses to move the pension scheme. KLP may re-price risks associated with future periods each year. The insurance contract is valued on the basis of rights accrued on the balance sheet date.  

The insurance contract is derecognised when the coverage period ends, either because the contract is moved away or because it expires. 

Premium income is presented on a separate line in the income statement. Sums received in connection with the transfer of new customers are also presented as part of premium income. 

Pension payments are presented as compensation payments in the income statement. Sums transferred when customers move away are presented as part of the compensation payments. 

Changes in the premium reserve are reported through profit/loss and are included in the balance sheet as “Premium reserve etc..” under “Total liabilities – contractual obligations”. 

Changes in the buffer fund are reported through profit/loss under “Changes in buffer fund”, and in the balance sheet as “Buffer fund” under “Total liabilities – contractual obligations”.  

Changes in the premium fund are shown on a separate line in the income statement and are presented in the balance sheet as “Premium fund” under “Total liabilities – contractual obligations”. 

The most important accounting policies relating to financial instruments and used from 1 January 2023 (IFRS 9) are described below. 

The most important accounting policies relating to financial instruments used up to 31 December 2022 are described below.  

1. Financial assets at fair value through profit or loss 

Financial assets at fair value through profit or loss are recognised in the balance sheet either as “Loans and receivables”, “Interest-bearing securities”, “Financial derivatives” or “Equity instruments”. Interest income and dividends are included in the line “Interest income and dividends etc on financial assets”.  

1. Financial assets at amortised cost 

Financial assets measured at amortised cost are presented in the balance sheet either as “Interest-bearing securities” or “Loans and receivables”. Interest income and write-downs are included in the line “Interest income and dividends etc on financial assets”.  

1. Financial liabilities measured at amortised cost  

Issued financial liabilities measured at amortised cost are presented in the balance sheet under the following items: 

Hybrid Tier 1 perpetual capital 

Subordinated loans 

Subordinated loans are recognised at fair value when they are taken out, adjusted for purchase costs. On subsequent measurement, subordinated loans are recognised at amortised cost. The method is used to allocate the interest costs over a relevant period and the value is shown in the income statement under “Other expenses”.  Subordinated loans in foreign currency are translated to NOK on the balance sheet date. Changes in value from changing exchange rates are shown in the income statement under “Other expenses”.  

Hybrid Tier 1 securities are recognised at their nominal value on the date of issue and valued subsequently at amortised cost. For hybrid Tier 1 securities hedged against exchange and interest rate changes (fair value hedging), the book value is adjusted by the change in value of the hedged risk. The change in value is recognised through profit/loss under “Other expenses”. 

1. Financial liabilities measured at fair value with changes in value through profit/loss 

Financial liabilities measured at fair value with changes in value through profit/loss are presented in the balance sheet under the following items: 

Financial derivatives 

Financial derivatives are recognised at fair value on the date when the contract is entered into. On subsequent measurement the derivatives are recognised at fair value and presented as an asset under “Financial derivatives” if the value is positive and as a liability under “Financial derivatives” if the value is negative.  For derivatives that are not part of any hedging transaction, any gains and losses are recognised as they arise under “Value changes on investments” or “Gains and losses realized on investments”.  

Investment property is recognised in the balance sheet when it is likely that future economic benefits arising from the property will accrue to the Company, and when the cost of the investment property can be reliably measured. Investment property is recognised at cost including transaction costs. Costs of an investment property under construction are measured at cost until it is completed.  

An investment property is derecognised upon disposal or when it is taken out of use with final effect and the Company does not expect any further financial gain from disposing of the property. The date of disposal of an investment property that is sold is the date when the recipient gains control over the investment property in accordance with the provisions on fulfilment of an obligation in IFRS 15 Revenue from Contracts with Customers. 

Investment property must be measured either at cost or at fair value with changes in value through profit/loss. The Company has chosen to use fair value with changes in value through profit/loss. Fair value is measured in accordance with IFRS 13 Fair Value Measurement. 

The Group uses a valuation model to estimate market value. The valuation method is based on discounting the expected net cash flow from the property by the market’s return requirements.  

In the first instance, the market rent on currently applicable terms is used in calculating net cash flow, whereas for periods after the expiry of contracts an estimated market rent is used. An income deduction is also taken into account for expected vacancy, expected maintenance/improvement costs and normal operating costs.  

The expected cash flow is discounted by a return requirement determined on the basis of the risk-free interest rate (10-year Norwegian Government Bond rate) with a adjustment for an estimated 20-year risk-free interest rate. The estimate for the 20-year interest rate corresponds to the slope of the swap curve between 10 and 20 years. The risk-free interest is then accorded a general property risk to find the return requirement for prime properties. Finally a risk premium is added which is determined on the basis of the willingness of the investors in the property market to accept risk, taking account of matters specific to the property such as geography, property type, contracts, tenants and technical state of the property. 

A selection from the Company’s property stock is valued quarterly by external, independent and qualified valuers. In the event of significant deviation from our own assessment of fair value, the differences are analysed and the valuation model’s parameters are adjusted if this proves necessary. 

Changes in fair value are recognised in the period in which the gain or loss occurs. 

If an investment property is occupied by the Company, it is reclassified as a tangible fixed asset. Fair value on the date of reclassification provides the cost price for the reclassified property.  

If a property that the Company has used is leased externally, it is reclassified as investment property. Any difference between book value and fair value on the date of reclassification is taken to owners’ equity as a revaluation.  

Investment property is presented on a separate line in the balance sheet. 

Changes in fair value and net rental income are presented in the income statement under “Value changes on investments”.  

• Determination of when there is a significant increase in credit risk on financial instruments measured at amortised cost: KLP has defined trigger points for what is defined as a significant change in credit risk which reflect a change in the calculation of expected credit losses. Loss given default and probability of default are determined by applying substantial discretion based on internal and external observable market data. 
• Determination of what is an active market: KLP has established requirements for daily turnover as a criterion for whether a market is considered to be active. The determination is based on discretion.   

The insurance liabilities are based on expected future cash flows resulting from the contract.  

The cash flow estimates related to disability risk are based on experience within KLP from its own population.  

For the other risk elements, including longevity risk, the assumptions from the K2013 calculation base are used with the contingency margins set by the Financial Supervisory Authority of Norway. For men, KLP uses its own life expectancy assumptions, which assume a greater life expectancy improvement than K2013. The same goes for hospital doctors. 

The disability and mortality rates are checked against the tariff each year in order to quickly capture any changes in the risk situation. 

For a sensitivity analysis for insurance contracts, please refer to Note 4 and section 4.1.5. 

In applying IFRS 13 Fair Value Measurement to investment properties, the Company has made estimates in the following areas: 

• Future cash flows 
• Discount rates 

The insurance risk for longevity is the risk of the insured living longer than expected (retirement pensions). Life expectancy has steadily increased over the last decade. Major factors behind this have been developments in medical science, and changes in diet and lifestyle.  

KLP uses analyses of its own insurance data and analyses from Statistics Norway (SSB) of population data to look at changes in life expectancy and annual variations in it. Expected future improvements in mortality (increasing life expectancy) are based on estimates from Statistics Norway. The analyses are used to determine the best estimate for future mortality used to calculate expected future cash flows. Data for recent years may be affected by Covid, so it is not clear that insights from recent history can be used to predict the normal situation going forward.  

As the retirement pension is lifelong, increased life expectancy will entail payment over a longer period. Public-sector occupational pensions have a built-in longevity adjustment which reduces this effect by reducing the annual benefit as life expectancy increases and vice versa. The longevity adjustment to pensions is calculated by Statistics Norway based on the improvement in life expectancy across the Norwegian population (regardless of gender) and may be different from the improvement in life expectancy in KLP’s membership.  

Insurance risk relating to mortality is a risk associated with survivors’ pensions, where the assumptions used differ from our actual experience. This risk is correlated with longevity risk but has far less impact on KLP’s overall finances.  

For disability pensions, the insurance risk is related to whether the trend in disability differs from the assumptions used.  Social factors such as business restructuring, changes in the physical and psychological work environment, changes in official regulations and technological development can affect disability. Recent historical data for disability is affected by the Covid. So, here again, it is unclear whether this data can be used to predict the normal situation going forward.   

In calculating expected future cash flows in the consolidated accounts, the assumptions on disability risk are based on experience from KLP's insured population. 

The Board has established a framework for insurance risk and guidelines for follow-up.  

The Director of the Actuarial and Product department bears the operational responsibility for managing, measuring and monitoring insurance risk on public-sector occupational pensions. The department analyses the trend in risk on an ongoing basis and prepares regular reports and analyses. The department determines the expected cash flows on the insurance contracts partly based on these analyses.  

If the analyses show changes in mortality or disability over time in one or more portfolios of contracts, Actuarial and Product draws up proposals for a new calculation base which is then reviewed by the Company's risk management committee chaired by the managing director. The managing director bears the overall responsibility for managing and pricing insurance risk and decides on changes in the basis for calculation. The changes are considered in determining future cash flows related to the insurance contracts. The Board is kept informed of the changes.  

The Group has an independent actuarial function which checks that the Group’s insurance risk is measured and handled in a satisfactory manner. 

The table below shows the consequence of an immediate change in the incidence of disability and mortality. 

Liquidity risk is the risk that the Company does not have adequate liquidity to cover short-term debt/residual liabilities not called in and current operations without substantial extra costs arising in the form of price falls on assets that must be realized.  The liquidity strategy contains various requirements and limits in order to comply with the desired liquidity risk profile. In addition, division of responsibilities and contingency planning are covered. The liquidity strategy is operated at the senior management level and the liquidity is managed internally in accordance with mandates. 

The need for liquidity in KLP is first and foremost associated with payments to pensioners and meeting current operating costs. Liquidity is also required for providing security in connection with currency and derivative trades. The KLP liquidity need is primarily satisfied by contractual receipts from customers. At all times the Company has a liquidity holding sufficient to meet current costs, including pension payments. In the event of liquidity needs beyond the current liquidity holdings, liquidity can normally be released through the sale of liquid financial assets. 

KLP's aims to have liquidity buffers corresponding to 3 months' expected liquidity needs.  

Refer to Note 5 Liquidity risk for further information on liquidity risk. 

Market risk is the risk of losses as a result of changes in market prices of various assets such as shares, bonds, property and other securities. The market risk depends on how large an exposure there is to the various assets and on the volatility in the market prices. Developments in the Norwegian and international securities markets generally have major significance for KLP's results. 

Risk of a fall in the value of various assets is the biggest financial risk in the short term. Of the risk in regard to assets, equity exposure is the largest financial risk factor, but also the market risk associated with interest, credit (spread) and property has a significant loss potential.   

At the end of 2023, 31.6 per cent of KLP's customer portfolios were placed in equities (measured by exposure) and 13.2 per cent were placed in property. Other funds were placed in the interest rate market where the main weight is measured at amortized cost, the remainder at fair value with change in value through profit/loss. 

KLP exchange-rate hedges most of the international exposure. Financial hedging of currency exposure is done through derivatives. In principle all of KLP's fixed-income investments and property investments in foreign currency are hedged back to NOK.  For equity investments in foreign currency the hedge ratio in 2023 has been between 50-70 per cent. For more information about currency risk please refer to Note 7. 

All equity and interest rate exposures are included in a risk measurement system that enables simulation and monitoring of equity and interest rate risk across the portfolios. Active risk is managed through defined benchmarks relative to the index for each portfolio. 

To reduce the risk of negative outcomes from market risk, KLP uses operational guidelines in client portfolios for daily management of market risk. This strategy helps to ensure that the risk is adjusted to the Company's risk capacity. The guidelines provide a return profile that aligns the overall target to have a satisfactory solvency margin and preserve the risk capacity over time. In addition, KLP has a high proportion of long-term bonds and fixed-interest lending that contributes to stability in returns. 

Derivatives are principally used for risk reduction for cost and time-effective implementation of changes in risk and for currency hedging. 

Emphasis is placed on diversification of credit exposure to avoid concentration of credit risk against individual debtors. To monitor credit risk in lending and investments a special credit committee has been established, meeting regularly. The limits for credit risk against the individual debtor are set by the committee. Changes in debtors' credit assessments are monitored and followed up.  

KLP has good balance between Norwegian bonds and international bonds and has a portfolio of exclusively good credit notes. Of the total credit exposure, 46 per cent is rated AA- or higher.  

KLP has a lending portfolio of high quality, with limited credit risk and historically very low losses. In the main KLP provides loans secured on housing with a mortgage level of less than 80 per cent, loans to local authorities and loans with local authority guarantees. Lending secured through mortgages on housing amounts to about NOK 3.0 billion.  The value of the mortgages represents a greater value than the lending since a large part of the mortgages were established earlier in time and the price rise in housing in recent years has been substantial. 

KLP has limited concentration risk. Because no exposures exceed the threshold values defined in the Solvency II regulations, KLP has no capital requirements for concentration risk under the standard method. The way in which the fixed interest and equity portfolios are managed will generally help to limit concentration risk through extensive use of index management. KLP sets explicit limits for lending which restrict concentration on specific individuals and groups. Sector concentration is monitored via monthly and quarterly reporting. 

Although the KLP’s investments are well diversified, there is a clear preponderance of investments in Norway. This is a deliberate and a natural consequence of dealing mainly with public-sector occupational pensions. 

Refer to Note 8 Credit risk for further information.