Annual Report 2024 KLP Group and KLPKLP Group and KLP

1. New and amended standards and interpretations which came into effect in 2024
   There are no new or amended IFRS Accounting Standards or IFRIC interpretations that have come into effect for the 2024 financial statements that significantly affect the Group's financial statements.
2. Standards, changes and interpretations of existing standards that have not yet entered into force and where the Group has not opted for early application:
   A new accounting standard for presentation and disclosures in financial statements, IFRS 18, has been published by the IASB in April 2024. This new standard will replace IAS 1 Presentation of Financial Statements. If endorsed by the EU, the standard will be effective for annual reporting periods beginning on or after 1 January 2027. KLP Group does not plan to early implement the standard.
   
   There are certain other changes in standards and interpretations that will be effective for annual financial statements beginning on or after 1 January 2025 and that have not been adopted in these financial statements. These are not expected to have a material impact on the financial statements.

The Group issues the following contracts that are accounted for in line with IFRS 17 Insurance Contracts:

Under IFRS 17, the insurance contracts have to be measured at an aggregated level and divided into portfolios. Each portfolio is divided into groups of insurance contracts which are recognised and measured according to the requirements in IFRS 17. On initial recognition, the Group groups contracts according to when they were issued. A group will contain all contracts issued within a 12-month period. Within the EU/EEA, an exception has been introduced to the rule that insurance contracts issued more than 12 months apart cannot be included in the same group. This exception is subject to certain conditions, and it can only be applied to issued insurance contracts with direct-participation characteristics, and the contracts must be equalised over time. The Group has determined that issued insurance contracts for public-sector occupational pensions meet these requirements and has therefore made use of the exception. These contracts are therefore grouped into the same portfolio even if they have been issued more than 12 months apart.

The Group has not identified any issued insurance contracts that are onerous on recognition and has no groups with onerous contracts.

The Group recognises its groups of insurance contracts from the earliest of the following dates:

• The start of the coverage period for the group of contracts

• The date on which the first payment from a Group policyholder is due (in the absence of a contractual due date, this is taken to be when the first payment is received)

When measuring an insurance contract, all future cash flows expected to arise within the scope (boundary) of the insurance contract shall be included.

The insurance contracts for public-sector occupational pensions start when the group assumes responsibility for the obligations arising from the contract, i.e. when the coverage period starts. The contracts run until they are terminated by the customer or until there are no longer any insured persons entitled to benefits from the contract. The contracts can be renewed annually for new earnings, as well as salary and G-regulation of previously earned rights. Previous earnings cannot be renewed. The insurance contracts for public-sector occupational pensions therefore have an infinite contract limit.

With a few exceptions, the Group’s contracts within non-life insurance have a contractual term of 12 months with the option to extend. The Group has no obligation to renew the contracts and may reprice all risk if they are renewed.

The Group's purchased reinsurance contracts run for 12 months without an obligation to renew.

The Group derecognises an insurance contract when the contract is:

• Extinguished, i.e. when the obligation specified in the insurance contract expires or is discharged or cancelled.

• Modified so that the derecognition criteria are met

When the Group derecognises an insurance contract due to modification, it derecognises the original insurance contract and recognises a new one.

The Group has presented the carrying amount of portfolios of insurance contracts as liabilities. Reinsurance contracts are presented as assets.

The Group disaggregates the amounts included in the consolidated income statement and other comprehensive income into a subtotal for the insurance service result comprising insurance revenue and insurance service expenses and a separate subtotal for net insurance finance income or expenses. The Group has voluntarily included net insurance finance income or expenses in another subtotal: net insurance and investment result, which also includes income from all assets used to cover the Group’s insurance obligations. Change in risk adjustment for non-financial risk is part of the insurance service result.

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 “Lending customers at fair value through profit or loss”, “Fixed income securitites at fair value through profit or loss” or “Equities and fund units”. Interest income and dividends are included in “Net income from investments measured at fair value with changes in value through profit and loss”.

1. Financial assets measured at amortised cost

Financial assets measured at amortised cost are presented in the balance sheet either as “Fixed income securitites at amortised costs”, “Lending customers at amortised costs”, “Receivables” or “Cash and bank deposits”. Interest income and amortisations are included in the line “Interest income, effective interest method”.

1. Financial liabilities measured at amortised cost

Issued financial liabilities measured at amortised cost are presented in the balance sheet under the following items: «Covered bond issued», «Debt to credit institution» and “Liabilities to and deposits from customers».

Liabilities to and deposits from customers are recognised at fair value in the financial position statement when the deposit is recorded as transferred to the customer’s account. In subsequent periods, liabilities to and deposits from customers are recognised at amortised cost in accordance with the effective interest rate method. The interest costs are included in the line “Interest expenses, effective interest method”.

Covered bonds issued are initially recognised at fair value adjusted for purchase costs, i.e. nominal value adjusted for any premium/discount on issue. On subsequent measurement the bond loans are valued at amortised cost by the effective interest method. The costs of interest are included in the line “Interest expenses, effective interest method” in the income statement. Bond loans issued with fixed interest are recognised in accordance with the rules on fair value hedging inasmuch as they are hedged against change in interest rate level.

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: «Subordinated loans issued», «Hybrid Tier 1 securities», «Liabilities to credit institutions» og «Financial derivatives»

Subordinated loans issued are recognised at fair value when they are taken out, adjusted for purchase costs. On subsequent measurement, subordinated loans are recognised at fair value. Interest costs are recognised through profit/loss under “Net costs subordinated loans and hybrid Tier 1 securities”. Subordinated loans in foreign currency are translated to NOK on the balance sheet date. Changes in value from changing exchange rates are recognised through profit/loss under “Net costs subordinated loans and hybrid Tier 1 securities”.

Hybrid Tier 1 securities are recognised at their nominal value on the date of issue and valued subsequently fair value. The change in value is recognised through profit/loss under “Net costs subordinated loans and hybrid Tier 1 securities”.

Liabilities to credit institutions are capitalised at market value on take -up. On subsequent measurement fair value is used when this eliminates or reduces accounting inconsistency. The interest costs are included in the line “Interest expenses, effective interest method”.

Financial derivatives are recognised at fair value at the time they are contracted. 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 are recognised as they arise under “Net income from investments measured at fair value through profit or loss”.

1. Hedge accounting

The Group has used hedge accounting in two cases. The two cases relate to fair value hedging of fixed-rate lending and borrowing hedged with interest rate swaps. The hedging relationship is documented, and its effectiveness is measured on a regular basis.

Changes in the fair value of the hedging instrument are included in the income statement under “Net income from investments measured at fair value with changes in value through profit/loss”. Value changes in the hedging object that can be attributed to the hedge risk are booked as a correction to the carrying amount of the hedged object and included in the income statement at the line for “Interest income, effective interest method” and “Interest expenses, effective interest method”. In those instances in which a security has inbuilt derivatives that are not separated out, the value of the derivative will be included in the security’s value as a whole.

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.

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 as “Fair value adjustment of investment properties and rental income”. Changes in fair value of properties due to currency changes are presented under Other income and expenses on the line “Translation difference foreign exchange”

• Assessment of significance of insurance risk: The Group applies its judgement in assessing whether a contract transfers to the issuer significant insurance risk. A contract transfers significant insurance risk only if an insured event could cause the Group to pay additional amounts that are significant in any single scenario, and only if it its a scenario that has commercial substance where the issuer has a possibility of loss in a current scenario.  
• Contracts issued that provide policyholders with a residual interest in the business: KLP is mutually owned, where the customers on public-sector occupational pensions are also owners of the business. IFRS 17 has defined criteria for what is considered mutual insurance business, where the policyholder is entitled to the net assets of the business. Determining whether an insurance contract provides the policyholder with a residual interest in the mutual entity, requires consideration of all substantive rights and obligations, whether they arise from a contract, law or regulation. A mutual entity accepts risks from each policyholder and pools that risk. The policyholders with a residual interest in the mutual entity bear the pooled risk collectively in their capacity as owners. The insurance contracts affect or are affected by the cash flows to policyholders of other contracts by requiring the policyholder to share with policyholders of other contracts the returns on the same specified pool of underlying items. This would be either: 
  • If the policyholder bear a reduction in their share of the returns on the underlying items because of payments to policyholders of other contracts that share in that pool, including payments arising from under guarantees made to policyholders of those other contracts, or  
  • If the policyholders of other contracts bears a reduction in their share of returns on the underlying items because of payments to the policyholder, including payments arising from guarantees made to the policyholder.  

The Group consider that the insurance contracts issued on public-sector occupational pension provide the policyholders with a residual interest in the Group.  

• Consideration whether there are investment components: The Group considers all terms of contracts it issues to determine whether there are amounts payable to the policyholder inn all circumstances, regardless of what happens to the contract. Some amounts, once paid by the policyholder, are repayable to the policyholder in all circumstances. If the policyholder has paid an amount that is always payable, this is considered an investment component, even though the amount may vary over time. 
• Separation of insurance components of an insurance contract: The Group issues insurance contracts that cover multiple types of risks. IFRS 17 does not permit separation of these components unless the legal form of the contract does not reflect its actual rights and obligations. In such cases, the different insurance elements must be accounted for separately. This requires judgment and is not an accounting policy choice. The Group considers the interdependence between the risks, whether the components can mature independently of each other, and whether they can be priced and sold separately 
• Determination of the contract boundary: The measurement of a group of insurance contracts includes all the future cash flows arising within the contract boundary The Group assesses its rights and obligations based on the contract, laws, regulations and business practices. Cash flows are outside the contractual limit if the Group can fully revalue the contracts to reflect the risks. The Group uses judgment to assess whether it can set a price that reflects all the risks, considering legal and regulatory restrictions. 
• Identification of portfolios: The Group defines a portfolio as insurance contracts subject to similar risks and managed together. Contracts within the same product and industry line are expected to be in the same portfolio as they are similar risks and are managed together. This assessment of which risks are similar and how contracts are managed requires the exercise of judgement.  
• Level of aggregation: The Group applies judgement when distinguishing between contracts that have no significant possibility of becoming onerous and other profitable contracts. 
• Assessment of directly attributable cash flows: The Group uses judgement in assessing whether cash flows are directly attributable to a specific portfolio of insurance contracts. When estimating fulfilment cash flows, the Group allocates fixed and variable overheads fulfilment cash flows directly attributable to the fulfilment of insurance contracts. 
• Level of aggregation for determining the risk adjustment for non-financial risk: IFRS 17 does not define the level at which the risk adjustment for non-financial risk should be determined, so the Group uses judgement.  The Group determines the risk adjustment at the entity level, allocating the diversification benefits to all groups of insurance contracts. The risk adjustment for a single group cannot be negative, and correlations between groups are ignored because they are already included in the overall risk adjustment. The total risk adjustment is allocated to groups based on their share of the Group’s expected fulfilment cash flows. 

There is uncertainty in the pricing of financial instruments that are not traded in an active market. This particularly applies to securities based on unobservable assumptions, such as private equity investments and other financial instruments that are priced using theoretical models. Changes in the assumptions can affect the values. Most of these instruments are part of the customer portfolio. 

• Determination of what constitutes an active market for financial instruments: The Group has established requirements for daily turnover as a criterion for whether a market is considered active. The determination is based on discretion.  

See Note 25 where the valuation of financial instruments at fair value is further described. 

By applying IFRS 17 to measurement of insurance contracts issued and reinsurance contracts held, the Group has made estimations in the following key areas:

• Future cash flows 
• Discount rates 
• Risk adjustments for non-financial risk 

Every area, including the Group’s estimation methods and assumptions used and other sources of estimation uncertainty are discussed below. A sensitivity analysis of exposure to insurance risk and its impact on residual value is included in Note 4. 

By applying IFRS 13 Fair Value Measurement on investment properties, the Group has made estimations in following areas:

• Future cash flows 
• Discount rates 

Cash flow estimates include both market variables directly observed in the market or derived directly from markets and non-market variables. External valuations are also obtained for parts of the portfolio on a quarterly basis. 

See Note 15 for further description of valuation of investment properties at fair value. 

There will be uncertainty around the pricing of financial instruments that are not traded in an active market. This applies in particular to securities that are priced based on unobservable assumptions. For these investments, different methods are used to determine fair value, such as private equity investments and other financial instruments that are priced using theoretical models. Changes in the assumptions may affect the recognized values. 

See Note 25 for further description of valuation of financial instruments. 

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.  

The Group 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. In particular, 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 basis for 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 depends on 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 also affected by the pandemic. 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 on the basis of 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 Group entity'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 taken into account 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 effect on the Group’s residual value from changes in the default assumptions used in the best estimates at 31.12.2024/31.12.2023. Sensitivity related to costs and transfers out is also included in the overview. The residual value is the part of the insurance obligation that is not included in the best estimate or the risk adjustment. This amount represents a liability of NOK 395,820 million at 31 December 2024, (NOK 355,979 million at 31 December 2023).  

All changes to assumptions are in % change of the standard assumption applied as of 31.12.2024.

*) Increased interest rate curve by 50 basis points for the liquid part of the discount rate curve, 1:10 years. Then extrapolated to an estimate for long-term interest based on the sum of long-term real GDP growth and Norges Bank's inflation target.

**) Reduced by 50 basis points for the liquid part of the discount rate curve, 1:10 years. Then extrapolated to an estimate for long-term interest based on the sum of long-term real GDP growth and Norges Bank's inflation target.

The entity has guidelines for which risks are accepted in the portfolio. Risks from customers within the entity’s target groups are accepted if they fit with the regular products. The premium is adjusted according to the customer's risk. In borderline cases, special decision-making routines are followed, and in the case of special risks, limitations in terms and coverage are considered. 

The entity reduces its insurance risk, including concentration risk, with reinsurance cover that limits the company's retention per claim.  

The entity’s Board of Directors has established a framework for insurance risk and drawn up guidelines for managing this risk. Risk management is handled on a daily basis by the entity’s Finance department. The entity has also established a separate risk management committee comprising the senior management group and three other key employees as permanent participants. The Group has established an independent actuarial function which takes the role of an impartial risk management unit. 

The table shows the change in the profit/loss to the entity and the Group’s residual value in the event of changes in key assumptions and parameters used to calculate best estimates. 

All changes to assumptions are in percent change of the standard assumption applied as of 31 December 2024.