Labour Court rules in pension transfer case

In October 2002, the Norwegian Labour Court ruled that the transfer of occupational pension schemes from the municipally owned insurance company KLP to private insurance companies, which was carried out by 11 municipalities in 1998, was contrary to the Basic Collective Agreement in the municipal sector. The 11 municipalities involved have until 1 July 2003 to make sure that their pension schemes satisfy the requirements of the collective agreement with regard to the type of financing.

In October 2002, the Labour Court (Arbeidsretten) ruled that the 11 Norwegian municipalities which had transferred their occupational pension schemes from the municipally owned insurance company Kommunal Landspensjonkasse (KLP) to private insurance companies, had breached the Basic Collective Agreement in the municipal sector. The 11 municipalities have until 1 July 2003 to re-establish pension schemes similar to those in operation before the transfers took place. The Court’s ruling has significant practical implications, given that several other municipalities had signalled a desire to transfer their pension responsibilities if allowed by the Court. It is also an important ruling of principle, in that the 'demarcation line' between collective agreements and competition law has been drawn up. The decision will most probably also have political implications. The government has signalled its intentions to provide opportunities for other insurance companies to offer the type of pension schemes that the municipalities are required to make available for their employees.

Background

The existing occupational pension scheme in the municipal sector guarantees that employees will receive a specific percentage share of their previous income when they retire. It also incorporates a disability pension. The scheme is regulated by the Basic Collective Agreement in the municipal sector. Since 1998, this agreement has also contained provisions relating to procedures for the transfer of pension obligations. At the time, an important principle was also introduced stating that new pension arrangements must be 'based on a financial support system which is gender neutral and does not seem exclusionary to older people'.

Pension schemes in the majority of Norwegian municipalities are run and administered by KLP, which is owned by the municipalities themselves. A significant feature of the scheme provided by KLP is that the municipalities pay an equal amount (ie a percentage of the wage) for all employees regardless of gender and age - in other words, contributions are calculated on the basis of all members collectively, and not on the basis of the costs involved in insuring each individual employee (or the employees in an individual municipality). Thus costs are levelled out across the municipalities and among individuals. The legal framework prevents other insurance companies from providing similar schemes that are based on such collective calculations/cost-levelling.

During the latter years of the 1990s, the dominant position of KLP became politically controversial, and the debate centred predominantly around the extent to which municipalities were allowed to choose a different supplier of such insurance other than KLP. The private insurance companies have systematically been working to gain access to this part of the pension market, which comprises more than 400,000 employees with occupational pensions (including those municipalities with their own public pension arrangements outside KLP). Following these controversies, several municipalities decided in the autumn of 1998 to transfer their pension schemes from KLP to private insurance companies, the results of which included lower annual premiums for the municipalities.

Points of disagreement

The several areas of disagreement over the municipalities' transfer of their pension arrangements may be reduced to the following main points:

• the extent to which the new pension schemes introduced by the 11 municipalities are in breach of the Basic Collective Agreement in the municipal sector, in particular the provisions concerning gender- and age-neutral financing; and

• if the new schemes do breach the agreement, whether the agreement’s provisions are then invalid because they are contrary to national competition law or Norway’s international commitments - under the European Economic Area (EEA) agreement - regarding free competition.

The case concerning the transfer of pension commitments from KLP to private companies was first brought before the Labour Court in 1999 by the Norwegian Union of Municipal Employees (Norsk Kommuneforbund, NKF), together with the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO). A central complaint by NKF and LO was that the new arrangements breached the principle of providing gender- and age-neutral financing. The main point of tension was the extent to which this principle assumes a financial system whereby the pension insurance premium is calculated on the basis of more than one municipality. In the new schemes, the cost of premiums is calculated on the basis of the composition of the workforce in question (ie all employees in the specific municipality concerned). NKF and LO claim that such an arrangement may discriminate against older people and women in recruitment, since individually calculated pension premiums will normally be higher for people in these groups. Thus NKF and LO argued that the 11 municipalities breached the provisions of the Basic Collective Agreement. They also asserted that the employers, in this case, had breached a number of procedural rules with regard to both the transfer of pension arrangements and the general obligation to consult employee representatives on such issues.

The municipalities concerned, on the other hand, contended that the case was first and foremost about the extent to which the municipalities have the right to transfer their pension arrangements as they see fit. They opposed the claim that the new arrangements were in breach of the Basic Collective Agreement’s provisions concerning gender- and age-neutrality. It was further argued that NKF and LO’s interpretation of the agreement means in practice that a transfer of pension arrangements is impossible, since only KLP may provide such a financial system. The close relationship between the Norwegian Association of Local and Regional Authorities (Kommunenes Sentralforbund, KS) and KLP was also emphasised. Thus it was argued that the provisions in the Basic Collective Agreement, as interpreted by NKF and LO, are in breach of the Act relating to insurance activity (1988 No. 39). Alternatively, the municipalities asserted that the Basic Collective Agreement is in breach of the EEA agreement’s competition rules, and as such must be discarded as unlawful.

The ruling

The Labour Court's ruling followed extensive discussions on the different judicial and collective agreement-related aspects of the matter concerned. The Court gave its support to NKF and LO’s claim that the principle of gender- and age-neutral financing must be interpreted in such a way as to provide for a levelling of the pension premium within a collective entity comprising several pension policy-holders (ie a collective larger than a single municipality). Although a different financial scheme does not have to resemble the KLP scheme in every detail, it must eliminate the additional marginal costs of hiring women rather than men, and older people rather than younger people, so that these costs do not provide an incentive to give preference to one group at the expense of others. The practical implication of this is that the present pension arrangements of the 11 municipalities concerned do not satisfy the requirements of the Basic Collective Agreement.

The other central question to be determined by the Court was the legality of the municipal sector Basic Collective Agreement, either because it was contrary to the Norwegian legal framework, or in breach of Norway’s commitments vis-à-vis the EEA agreement. The Labour Court found that the provisions of the Basic Collective Agreement are not unlawful according to the national legal framework. In relation to the issue of its legality vis-à-vis EEA agreement (Articles 53 and 54), the Court found it necessary to consult the European Free Trade Association (EFTA) Court on the matter. The EFTA Court declared that: 'Provisions of a collective agreement that pursue the objective of improving conditions of work and employment fall outside the scope of Article 53 EEA.' The Norwegian Labour Court then found that the relevant provisions of the Basic Collective Agreement were agreed upon for the purpose of improving the conditions under which appointments take place and work is carried out, and as such are not invalid.

The Court also found that the relationship between the KS employers' organisation and KLP is not of such a nature that they may be regarded as a single company which has exploited its dominant position (which would contravene Article 54 of the EEA agreement).

Although the defendant municipalities gained support in some areas, the Labour Court's October ruling must be regarded as more or less a complete victory for NKF and LO. The municipalities have been compelled to establish pension schemes that meet requirements with regard to a levelling of premiums. The deadline for this has been set for 1 July 2003. However, the ruling does not force the municipalities to revert to their original provider of insurance, KLP (if other providers can be found). The municipalities involved and KS were also made to pay the substantial legal costs, something which is not automatically done in such cases.

Commentary

The ruling of the Labour Court must be regarded as an important victory for the employee side on more or less all counts. The ruling has a significant bearing on the choice of pension provider available to Norwegian municipalities. Furthermore, it is also now a legal fact that competition law does not override collective agreements in so far as the purpose of the agreements' provisions is to improve terms of employment and working conditions. The result of the ruling may also have the effect of cutting short attempts by other municipalities to transfer pensions schemes, at least for the time being.

The case is also expected to have political implications. The government has signalled a wish to change the regulatory framework in such a way as to open up for alternative providers of occupational pension arrangements, which will allow also private insurance companies to calculate pension premiums collectively. Thus the implication of this may be increased competition with regard to the provision of pension arrangements in the municipal sector. (Kristine Nergaard, FAFO Institute of Applied Social Sciences)