White Paper on pension reform presented

In December 2004, the Norwegian government issued a White Paper setting out a strategy for a new pension system. It involves a public basic pension for all, as well as a public supplementary pension, with pensions to a greater degree than today depending on individuals’ life-time income and labour market participation. The government also proposes the introduction of a compulsory occupational pension. Trade unions have already expressed opposition to some of the proposals.

On 8 December 2004, the Norwegian government issued a White Paper proposing changes to the present pension system (Stortingsmelding nr. 12 (2004-2005)). The White Paper follows the report of a public committee which in January 2004 put forward its proposals for a new system (NO0402101F), and represents the government's initial position on the matter. The issue is to be subject to parliamentary consideration before a legislative proposal is made. The White Paper takes on many of the recommendations made by the committee, calling for a system that motivates labour market participation and, as a consequence, in which pension payments to a greater degree than today depend on the labour market participation and income of individuals throughout their lives. The government also proposes the introduction of a compulsory occupational pension for all, to which it committed itself during the 2004 collective bargaining round (NO0404101N). The government's recommendations take into account some of the criticisms that the committee’s proposals were gender-biased, and the committee’s proposal in relation to early retirement from the age of 62. It further proposes to have one of the more controversial issues, that of making changes to occupational pension schemes of public employees, considered by a public committee.

Main points of the proposals

A core objective of a new state - or National Insurance - pension scheme proposed by the government is to encourage higher labour market participation than is the case in the present system. To accomplish this, the proposed system links pension contributions more closely to income over a person's career. The key points of the proposed new system are:

• a guaranteed pension level for all equivalent to the present minimum state pension through the National Insurance scheme;

• the possibility of retiring early at the age of 62 for those who have accumulated sufficient pension rights. However, this implies a considerably reduced annual pension compared with those who stay in employment beyond the age of 62;

• the improvement and development of the accumulation of pension rights for people who take unpaid leave to care for children below school age, and for sick, disabled or elderly people;

• the introduction of a mandatory supplementary occupational pension on top of the new National Insurance scheme;

• the establishment of a 'state pension fund';

• the introduction of a 'life expectancy adjustment ratio' to ensure that pension payments are adjusted according to life expectancy of the population at large;

• indexation whereby annual pension entitlements are adjusted according to an average of wage and prices growth; and

• the adjustment of public sector occupational pension schemes to a modernised National Insurance pension scheme, in order that these schemes do not counteract the effects of the pension reform.

The government’s plans maintain the principle of a public pension system safeguarding a minimum pension for all regardless of participation in employment. The public pension system would, however, also include a supplementary pension based on the accumulation of pension rights through participation in employment. In other words, public pensions would still form the basis of a future pension system. Pension payments would be calculated on the basis of all years spent in employment ('life-span accumulation'), as opposed to the present situation in which the pension is calculated on the basis of the best 20 years of earnings. Each year in employment would provide higher pension rights, and people with a high income would receive greater benefits than is the case today. The implication is that those who work full time over a substantial number of years would benefit, while employees working part-time during some periods, or with fewer years of employment, would lose out compared with the present situation. Since it is mainly women that work part time and/or stay at home with children, the public committee's original proposal on this point was criticised for being gender-biased to the disadvantage of women. The government has taken some of this criticism into account by proposing improved pension rights in relation to time spent on unpaid care responsibilities, which would have retroactive effect. The government also proposes a sharing of public pension credits between spouses in the event of divorce. This would also be to the benefit of women. Despite these efforts, the government’s proposal has still been criticised for being too gender-biased.

The government also proposes following up other recommendations made by the pension committee. First, the government proposes to introduce an 'adjustment ratio' to ensure that pension payments are adjusted to life expectancy of the relevant population cohorts. For example, if life expectancy is expected to increase for 67-year-olds, employees must stay longer in employment in order to receive the same pension payments. Such a provision would make pension payments less vulnerable to increases in the average life expectancy rate. This is regarded as one of the more important measures proposed in order to reduce the future costs of the National Insurance scheme. Pensions would also be adjusted annually according to a factor corresponding to the average of wage and price growth. One may thus assume that income developments among pensioners would be lower than among people in employment. This would also contribute to a reduction of pension costs in the future.

The government also proposes to establish a pension fund based on two existing funds, the Government Petroleum Fund and the National Insurance Fund. There are already substantial assets in these two funds, but additional funds would be provided on an annual basis.

The proposed new pension system would be introduced incrementally. The first cohort of pensioners that would have their pension fully calculated according to the new system are those born after 1965. People born before 1950 would not be affected by the changes.

Early retirement

Early retirement arrangements have been a central issue in the discussions surrounding the future pension system. Today many employees have the opportunity to retire at the age of 62 through the agreement-based early retirement scheme (AFP). This scheme is based on financial contributions from the state as well as from employers. The public pension committee proposed withdrawing the state's contribution to this scheme. Instead an alternative model for early retirement was proposed. Estimates suggest that under the pension committee’s original model many employees would not satisfy the criteria for retiring at the age of 62. The government’s new proposal on the other hand would allow more people to retire early. The government also proposes the option of partial retirement, ie the possibility of combining work and receipt of a pension. Nevertheless, many women working part time or spending considerable time at home will still not have earned enough pension rights to retire at the age of 62. The government is also deliberating whether or not it will withdraw state subsidies to the AFP scheme. Today, state contributions meet around a quarter of the costs of AFP. Employers cover the rest. If the state contribution is cut, the whole scheme will most probably have to be renegotiated.

Under the government's plans, the total lifetime pension received would on average be the same for those who retire early as for those who do not. This means that the sum total of accumulated pension at the time of retirement would be distributed over more years for those who retire early - the annual payments during the remaining lifespan would thus be reduced accordingly. Retirement at the age of 62 would, according to this way of calculating pension payments, generate a 25% reduction in annual pensions compared with retirement at the age of 67 (the retirement age set by the National Insurance scheme). Retirement at 62 would in addition lead to a reduction in pension payments as a result of the loss of five years' contributions. Those who retire early would thus receive a significantly lower annual pension than those who stay longer in employment. It would also be possible to combine work and pension without a reduction in pension payments, and to accumulate pension rights from work carried out after the age of 70, which is not the case today.

Mandatory occupational pension

The government proposes to establish a mandatory occupational pension to supplement the new National Insurance scheme. Today all public sector employees and almost half of all employees in the private sector are covered by such pensions schemes. The government pledged in connection with the 2004 collective bargaining round to introduce a mandatory occupational pension for all employees. The White Paper discusses several alternative solutions, such as the introduction of minimum requirements for existing supplementary pension systems or the introduction of a defined-contribution scheme for all. The first model would take as its point of departure the existing legal framework (NO0401103S and NO0101119F), but with some minimum standards with regards to contributions. This would be a decentralised model whereby occupational pensions are mainly company-based. The second model discussed is a centralised model in to which a contribution for each individual employee is paid as a percentage share of the annual wage (eg a minimum of 2%). This model involves individual contribution accounts managed by approved pension providers. The tax authorities would be responsible for the collection of contributions. A final model, which largely corresponds to a Swedish 'premium pension' scheme, would apply to everyone, and be the same for all. The type of model chosen must be considered in the light of the broader pension reform subject to deliberations in parliament. However, a defined-contribution scheme directly tied to the individual employee and not to the employer, would, according to the government, be well adjusted to a more flexible labour market in which employees change jobs more frequently than was previously the case. Those not covered by occupational pensions today would, regardless of chosen model, benefit from a form of minimum standard based on a defined-contribution scheme.

The government also stipulates in its proposal that the public sector occupational pension schemes must be shaped in such a way that they do not counteract the intentions and effects of the more general pension reform. Today these schemes provide public employees with a gross pension of 66% of their salary at the end of employment. Under the present arrangements, public sector employees would be protected from many of the proposals entailing a tightening of the present system. There is thus no doubt that the government wishes to alter the present public sector occupational pension schemes. The government proposes to establish a public committee with representation from the social partners to deliberate possible changes to the public schemes in the near future.

Commentary

The proposed reform of the National Insurance pension scheme, including the introduction of a mandatory occupational pension, will be one of the largest reforms of Norwegian welfare institutions in a long time. There is also broad political consensus about the need for a pension reform that, among other factors, takes into account the important demographic developments expected in Norway in the years to come. It is thus regarded as an imperative to find a solution subject to broad political support.

At the same time it is evident that many of the aspects proposed, directly or indirectly, in the White Paper are politically controversial. This is particularly the case in relation to issues concerning: the rights already accumulated by employees; the occupational pension arrangements of public employees; state subsidies to the AFP early retirement scheme; and the 'special retirement age arrangements' that allow some occupational groups to retire earlier than the age of 67. Although the government is not at present proposing any concrete changes to these arrangements, it is nevertheless evident that a weakening of the present rules is envisaged. Trade unions have not surprisingly warned that they will fight to protect these arrangements. In this context, the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO) has expressed its reluctance to participate in the committee that is to come up with proposals for alterations to public sector occupational pensions.

The pensions issue will beyond doubt feature high on the political agenda in Norway in the months to come. It remains to be seen whether or not a political compromise may be reached in the course of spring 2005, or whether the issue of changing the pension system will be high on the agenda during the general election in the autumn. It is, however, reasonable to assume that the government - a centre-right coalition of the Conservative Party (Høyre), the Christian Democratic Party (Kristelig Folkeparti, KRF), and the Liberal Party (Venstre) - will be interested in finding a negotiated solution in order to prevent the issue becoming a central issue during the general election.

A central question will be stance taken by the Norwegian Labour Party (Det norske Arbeiderparti, DnA), which is the largest opposition party and alternative government, in the run-up to the general election. The DnA clearly sees a need to reform the present pension system. There is little disagreement over the main principles of the proposed reform by the government, although the DnA wants to see a system that awards greater pension benefits to low-wage groups, as well as increased opportunities for early retirement. At the same time, the DnA will find some of the government's recommendations hard to accept. The trade union movement, fronted by LO, will most probably use its traditionally close ties with the DnA to promote its opposition to parts of the reform. This is particularly the case in relation to the AFP, which is high on LO's agenda, and the issue of public sector occupational pension schemes, which affect a number of trade unions both within and outside LO. However, the Prime Minister, Kjell Magne Bondevik, has signalled the government’s willingness to enter into negotiations and expressed his optimism about agreement being reached between the government and the DnA on a new pension system. As such, one might argue that the DnA's bargaining position is fairly strong. (Kristine Nergaard, FAFO Institute for Applied Social Science)