New regulations related to occupational pensions came into effect in Norway on 1 January 2001. The most significant change is that companies may now receive tax allowances in connection with "defined-contribution" pension plans. The development of such plans is generally welcomed by the social partners.
On 1 January 2001, new regulations came into effect concerning occupational pensions (Lov om innskuddspensjon i arbeidsforhold). The new regulations provide for companies to receive tax allowances in connection with "defined-contribution" pension plans. Such allowances were previously confined to "defined-benefit" plans. The Norwegian parliament (Stortinget) has also approved a new Act on defined-benefit plans. It provides essentially for a continuation of existing regulations but with some new provisions, including a strengthening of the rights of part-time workers.
Background
In Norway, all employees are covered by state pensions through the national insurance scheme (Folketrygden). This is a two-tier system with a universal flat-rate pension applicable to all, combined with an additional earnings-related pension. The size of the earnings-related pension is conditional on the length of employment and on the income level during employment. Pensions received from the national insurance scheme will for most employees mean a significant reduction in income compared to what they earned while in employment. Thus, a large number of employees participate in additional occupational pension schemes at the workplace. Public sector employees, among others, enjoy collective schemes that are considered as relatively favourable for the recipients. In the private sector, there are significant variations in both the magnitude and the content of occupational pension schemes, while only one-third of all private sector employees are covered by such schemes at any given time. The schemes require a relatively extensive contribution period in order for them to constitute a significant supplement to the ordinary state pension.
New regulations on defined-contribution plans
From 1 January 2001, Norwegian employers will receive tax allowances in connection with "defined-contribution" pension plans, which entail the company paying a fixed amount of money into a pension account on behalf of the employee, such as a percentage share of an employee's income. The payments to employees from such schemes totally depend on the amounts going into the account, and the yield from these accounts. In other words, they work very much like ordinary savings schemes. The advantage of such a scheme is that it improves the employer's ability to manage present as well as future pension commitments, because the payments into the scheme do not depend on the age or sex of its workforce, and because the scheme does not guarantee a fixed pension level.
Tax allowances have previously only been given in connection with "defined-benefit" plans. Employees participating in such schemes are guaranteed a fixed pension amount - for example an addition to the state pension which together with it adds up to a predetermined proportion of the employee's original income level, or a fixed monthly figure. The cost of such schemes depends on matters such as the age composition of the workforce, and the stage of their careers at which employees are allowed to join. Most of the occupational pension schemes today are of this type.
The introduction of tax allowances on defined-contribution plans comes after a long period of deliberation and political debate. As early as 1994, a public committee recommended tax allowances on such schemes, but the Labour government of the time opposed such a proposal in its White Paper on "equitable redistribution". A majority in parliament, however, wanted to deliberate the issue further. In 1999, a new public committee proposed introducing tax allowances on defined-contribution plans. The rationale for bringing the issue back onto the agenda was a wish to facilitate the establishment of occupational pension schemes in companies where such schemes are absent, including many small and medium-sized private sector enterprises. There are at present a large number of such enterprises without occupational pension schemes.
There is more or less a general consensus among the social partners and the government about the introduction of defined-contribution plans, although it is stressed that they must not be allowed to undermine the national insurance scheme. However, some were worried that this would lead to a transfer from defined-benefit plans to defined-contribution plans.
As with defined-benefit pension plans, there are certain requirements that must be met before tax allowances are granted in relation to defined-contribution plans. The most important is that all the company's employees must be covered by a pension scheme, and that employees are given equal treatment. Defined-contribution plans must also ensure that employees receive pension payments over a period of 10 years or more after the ordinary retirement age (67 years). Payments are to be distributed equally over the whole 10-year period. However, the individual recipient may decide to receive pension payments for more than 10 years, ie accept smaller amounts per year.
New Act on defined-benefit plans
The new Act relating to defined-benefit pension plans( Lov om foretakspensjon) also took effect on 1 January 2001. The regulation of occupational pension schemes was previously covered by the Act relating to taxation on property and income (Skatteloven). The existing provisions concerning occupational pensions (ie defined-benefit plans) are by and large continued by the new Act. The new provisions do, however, improve the rights of part-time employees, and support demands for participation by young and low-wage employees in company pension schemes. It had previously been possible to exempt newly employed or young employees, and also to impose an incomes threshold below which employees were not entitled to be covered by pension schemes. Although these are groups that do not significantly benefit from joining such schemes within the present pension system, it is nevertheless argued that they would benefit in case of receiving disability benefits (which in many cases are included in the pensions schemes), and in situations where incomes conditions later change.
The revised legal framework also gives part-time employees improved incentives to a participate in contribution-based pension schemes. Furthermore, the provisions concerning the accumulation of pensions rights and pension contributions have been changed in such a way that companies will now pay more for younger employees and less for older employees, than previously was the case. This will make it easier to change jobs, especially for older employees. Pension expenditures in relation to older employees have in the past been disproportionately high. Companies may also pursue parallel schemes involving defined-benefit plans and defined-contribution plans.
Commentary
Although the regulatory framework concerning occupational pensions have been through a series of thorough deliberations and revisions in recent years, there are few indications to suggest that the pensions issue will be put to rest in the years to come. A comprehensive revision of the national insurance scheme is soon expected to appear on the political agenda. There are concerns about the state's ability to finance the scheme in the face of demographic developments that place increasing pressures and further demands on the services provided by the national pension system. The Ministry of Finance, Karl Eirik Schjøtt-Pedersen, intends to establish a public committee with representatives from the political parties, with a mandate to consider and propose changes to the national pension system, among other aims to encourage older employees to stay longer in employment than they do today.
Another central issue in the pensions debate is how to safeguard the pension rights of those not currently covered by private pensions schemes. It is clear that the relatively broad support given to the introduction of defined-contribution plans, among others from the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO), owes a lot to the hope that such schemes will make it easier to establish occupational pension schemes in sectors and types of company presently with a low coverage by such schemes. Furthermore, LO has signalled that its next priority and a major demand in forthcoming wage settlements will be an occupational pension reform in the private sector. Occupational pension schemes are rarely part of central collective agreements in the private sector, and the pension schemes that exist in the private sector are mostly schemes that cover a single company. It is not clear, however, how LO envisages that occupational pensions may be incorporated into collective agreements, and the extent to which it envisages a nationwide regulatory framework or otherwise. (Kristine Nergaard, FAFO Institute for Applied Social Science)