Controversial pension reform proposed

In January 2004, a public committee announced its recommendations for a reform of the Norwegian pension system. The main objectives of the proposal are to establish a closer relationship between the income earned and pension received, and to encourage older employees to stay longer in employment rather than retiring early. Parts of the proposal have met with strong criticism from trade unions.

On 13 January 2004, a public pensions committee issued its report on reform of the Norwegian state pension system, the National Insurance Scheme (NIS). The committee was led by a former Minister of Finance, Sigbjørn Johnsen, and included representation from all the major political parties, as well as independent experts. In its report, the committee proposes a future pension system that to a greater degree encourages people to stay longer in employment than is the case today. It also recommends a closer linkage between income (wages) and the accumulation of pension rights. The implication is that employees with a long and stable participation in employment will accumulate more pension rights than those with periods away from the labour market. The proposed new system would also benefit those with a high income and those working full time. The committee emphasises that occupational pension arrangements should be a supplement to NIS, but there is no consensus within the committee on the issue as to whether or not such pension arrangement should be voluntary (as is the case today) or compulsory. One of the most controversial recommendations is that the state should end its contributions to the agreement-based early retirement scheme (AFP), which allows many employees to retire from the age of 62. Another controversial proposal is to alter occupational pension arrangements in the public sector.

Background

The pensions committee was set up in March 2001, and given the mandate to consider 'the main objectives and principles of an integrated future pension system'. Demographic developments coupled with increasing pension entitlements among future cohorts of pensioners were seen to necessitate a review and possible changes to present pension arrangements. Among the issues to be considered by the committee was the division of responsibility between state-run arrangements (NIS) and non-state arrangements in the form of occupational and individual pension schemes. The committee was also to examine the issue of introducing a fund-based financing system, and look at developments in relation to early retirement, as well as the need for early retirement schemes in the future. It was emphasised that the committee, in its work, was to take into account issues pertaining to equal opportunities, changes in family patterns, and a general desire to create a simpler and more intelligible pension system. The committee delivered a preliminary report in the autumn of 2002 (NO0209103F).

Present pension system

In Norway, everyone is entitled to a pension from the NIS scheme from the age of 67. The amount of benefits received from NIS depends on accumulation of pension rights through employment, but everyone is entitled to a minimum pension (minstepensjon). In addition to this, people may also receive supplementary occupational pensions. In the public sector, such arrangements are applicable to all employees, while in the private sector, according to estimates from the pensions committee, only approximately a third of all employees in the private sector are subject to supplementary occupational pension schemes (NO0101119F). Moreover, there is the AFP voluntary early retirement scheme (NO0103125F). This is a collective agreement-based scheme which makes it possible for many employees to retire from the age of 62. It is financed by contributions from the employees agreed in wage settlements, from employers through contributions to funds, and from the public authorities through the tax system.

The committee’s recommendations

Shape of future state pensions system

The committee stresses that there needs to be a closer linkage than is the case today between the individual employee's actual income over his or her career span and the size of the state pension received. It proposes that the universal minimum pension and special supplementary benefits, that together constitute the basic pension in the present system, should be abolished and replaced by a 'pension guarantee', which would be reduced proportionately to the amount of accumulated income-based pension.

The main element of the proposed new pension system is an income-based pension accumulated from the first day of employment. The employee would acquire entitlement to a pension worth 1.25% of annual earnings per year of contributions, which means that an employee with 43 years of employment would entitled to a pension from the NIS corresponding to 54% of his or her previous income. At present, in order to receive a full pension from NIS an employee must have been in employment for 40 years, and the pension is calculated on the basis of the best 20 years of earnings. The new scheme, if approved, would thus benefit those with a long and stable career, while those working part time, or who for some reason have periods away from employment, will stand to lose out since 'the best 20 years' are no longer part of the equation. Pension rights (points) would also be awarded for work carried out in the home taking care of a family (eg pre-school children, sick and disabled family members, and older people). Contributions would be levied on income up to an annual ceiling set at approximately NOK 455,000. Income beyond this level would attract no further pension entitlement.

The committee calls for the introduction of a so-called 'stabilising factor', which will ensure that annual pension payments are reduced in proportion to future increases in expected average longevity. It further recommends that pensions should be adjusted in line with an index based on a weighted average of price and wage growth. Increases in pensions would thus most probably be much slower than the average wage growth.

The committee estimates that the changes proposed to the pension system will have the effect of reducing total state pension payments by 20% in 2050 compared with a continuation of the present system. The reduction would be achieved through a reduction in the number of pensioners/more people in the workforce, a reduction in the average pension awarded, and increased productivity.

Early retirement

The committee recommends the introduction of a flexible pension age from the age of 62. Those who retire early would receive a significantly lower annual pension than those staying longer in employment. The idea is that people who leave employment early or late will receive more or less the same overall amount of benefits over their pension period. Employees who retire early would thus partly have to cover their own expenses. The committee also recommends that the government’s should no longer contribute to the AFP early retirement scheme.

The report calls for a revision of the arrangements regarding 'special' retirement ages. A significant number of public employees are covered by regulations enabling them to retire earlier than the age of 67. It is evident that the committee want to see fewer employees departing early by means of such special regulations.

Financing of state pension responsibilities

The committee is of the opinion that the NIS pension scheme should be financed mainly through taxes. In other words, it has not opted for a fully fund-based state pension model. The committee also calls for the creation of a new state fund, which should reflect both the state's commitments in relation to NIS (expenses) as well as the state’s petroleum revenues (incomes). The proposed new fund, the State Pension Fund (Statens Pensjonsfond), would be based on two existing state funds (the State Petroleum Fund and National Insurance Fund). The proposed new fund would help safeguard future pension liabilities. The committee also aims to create increased transparency with regard to the relationship between the state's commitments through NIS, capital developments in the new State Pension Fund, and economic policy in general. This is to be achieved by means of an annual account in which future pension liabilities are outlined and compared with capital developments in the State Pension Fund. The goal is that the gap between these two factors (as percentage of GDP) should not increase over time. If the gap increases, the government would have to give an explanation to parliament (Stortinget).

The committee proposes that the state’s pension responsibilities as an employer - ie its expenses in relation to the state occupational pensions scheme (Statens Pensjonskasse) - should be fund-based.

Occupational pensions

A number of issues are discussed in the report in relation to occupational pensions. There is a general consensus in the committee that such supplementary arrangement should be allowed to play a more important role in the future, including in the private sector. Today all employees in the public sector are covered by arrangements providing supplementary pensions, but this is the case only for a third of private sector employees.

The committee recommends changes to the way in which public sector occupational pensions are calculated. Today public employees are covered by an arrangement that provides them with a pension corresponding to 66% of their income at the time of retirement. This is a so-called 'gross arrangement', in that the total pension level of 66% of the final wage is maintained even if benefits from the basic NIS scheme are reduced. The committee proposes to change the occupational pension arrangements in the public sector into a 'net supplement' to the benefits provided by NIS. The implication is that a reduction in the benefits provided by NIS - eg as a result of increased average longevity (see above) - will also have an effect on the pensions of public employees.

Another issue discussed in the committee’s report is how to increase the coverage of supplementary occupational pension schemes in the private sector. The committee is split on this issue. Some of the committee’s members argue in favour of voluntary measures, eg through the social partners entering into collective agreements. To support such an argument they state that such arrangements are already being promoted, in that 'defined-contribution' arrangements have recently been made tax deductible (NO0101119F). Other members advocate the introduction of more compulsory legal measures applicable to all employees and employers. These are assumed to take the form of minimum occupational pension arrangements, while those with better arrangements could keep them.

Implementation

The new pension system should, according to the committee, come into effect from 2010, and then be gradually phased in over a period of 15 years.

Social partner views

The relevant parties, including the social partners, have until 15 May 2004 to give their comments and views on the committee's proposals. The social partners have already expressed their views on the proposal as a whole and on the most important recommendations.

Employers' organisations on welcome the committee's proposals, and express satisfaction with the fact that they aim to facilitate increased labour market participation among older employees. However, the Confederation of Norwegian Business and Industry (Næringslivets Hovedorganisasjon, NHO) does want to a shift in the direction of a more fund-based arrangement in NIS, as is currently the case for most occupational pension arrangements. The Federation of Norwegian Commercial and Service Enterprises (Handels- og Servicenæringens Hovedorganisasjon, HSH) emphasises that a compulsory occupational pension model would mean significant costs for small and medium-sized enterprises, and that any such scheme must be offset by tax reductions for these companies. The NAVO employers' organisation, which mainly organises deregulated former state companies, emphasises that a new pension scheme must promote mobility of employees between sectors. The Norwegian Association of Local and Regional Authorities (Kommunenes Sentralforbund, KS) points to the employers' need for more predictability with regard to future pension costs, and emphasises, like NAVO, the importance of encouraging mobility between sectors.

Trade unions are on the whole more reluctant towards the recommendations. They all oppose any changes to the occupational pension schemes in the public sector, and have pledged to fight these proposals. They stress that these pension schemes form part of the general wage conditions in the public sector, and that any weakening of them must be compensated for in the form of significant pay increases.

The Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO) has so far been critical about the committee’s proposals. The leader of LO, Gerd-Liv Valla, argues that the proposal is unfair in that it is those groups on an ordinary income and those who retire before the age of 67 that stand to lose from the proposed reform of the present system. The proposal to weaken or abolish the AFP early retirement scheme has also met with strong opposition in LO. It is argued that many employees in physically strenuous occupations are unable to continue working until the age of 67, and that the AFP has allowed these groups a necessary earlier departure from the labour market.

The Confederation of Vocational Unions (Yrkesorganisasjonenes Sentralforbund, YS), on the other hand, has expressed satisfaction with the overall proposal, and also supports the idea that pensions should to a greater degree reflect the actual income earned by employees. The Confederation of Higher Education Unions (Utdanningsgruppenes Hovedorganisasjon, UHO) states that changes to public sector occupational pension schemes will have particular adverse effects on many part-time women workers in this sector, and labels this part of the proposal as a 'declaration of war' against the trade unions. The Federation of Norwegian Professional Associations (Akademikerne) has also criticised some of the recommendations in the report.

Commentary

The report of the pensions committee and the process towards a new pension system will be a central political issue in the months to come. Not only do the changes proposed entail the most comprehensive alteration of the NIS scheme since its establishment in the 1960s, but the decisions made in this regard will have a significant bearing on the development of the pension system in decades to come. It is thus important to establish broad political agreement about the main principles of a pension system that may withstand changes in political configurations and parliamentary majorities in future.

Criticism has mainly been directed at the adverse distributional effect of the proposals. Critics point to the fact that the distributional mechanisms of the present system would partly evaporate as a result of the changes proposed to the system. Moreover, the strict employment history requirements proposed in order to accumulate maximum pension rights means that a significant number of groups will fail to benefit, compared with the present system. Estimates suggest that it is employees with a low or medium income that will stand to lose the most. Women periodically working part time will also lose out, as the pension would be calculated on the basis of the whole period of employment, and not the 20 best years. In addition the proposed income and employment requirements connected to the special provisions on early retirement (from the age of 62) are so strict that many employees - and especially many women - would be excluded. One must thus assume that there will be significant debate and 'pulling and hauling' over the distributional effects of the proposals.

The report will also place the pension issue on the agenda of the social partners in the months to come. Neither occupational pension schemes nor special provisions concerning early retirement in the public sector may be changed without prior discussions and negotiations with the trade union organisations concerned. The unions have pledged to fight many of the recommendations made and to defend their rights. LO's stance on the AFP issue may make life difficult for the Norwegian Labour Party (Det norske Arbeiderparti, DnA). DnA’s representative on the pensions committee supported the recommendations that may mean the end of the AFP, but the party has so far not taken a formal stance on the issue, nor on any of the other controversial proposals in the committee's report.

Another issue placed on the agenda by the committee is that of occupational pension schemes in the private sector. Today only a third of private sector employees are subject to such arrangements. LO-affiliated unions raised the further introduction of occupational pensions as a demand in the 2002 bargaining round (NO0202104F), but only managed to get support from the employer side for company-level discussions/deliberations (NO0206105F). The issue is also expected to be among the LO unions' demands in the 2004 wage round. (Kristine Nergaard, FAFO Institute for Applied Social Science)