Consensus reached on new pensions system

In May 2005, a resolution setting out the main principles on which a new national pensions system is to be built was approved by the Norwegian parliament, which also agreed that all wage earners will be entitled to an occupational pension through employment. The resolution is based on a broad compromise between the centre-right coalition government and key opposition parties, and is approved in principle by the central social partner organisations.

In May 2005, the main principles of a new pensions system was approved by the Norwegian parliament (Stortinget). The resolution adopted is based on a compromise between the three centre-right minority coalition government parties - the Conservative Party (Høyre), the Christian Democratic Party (Kristelig Folkeparti, KRF), and the Liberal Party (Venstre) - and two opposition parties - the Norwegian Labour Party (Det norske arbeiderparti, DnA) and the Centre Party (Senterpartiet). In the agreed new pension system, there will be a much closer correlation between actual pension payments and career-long employment. The implication of this, in conjunction with other legal revisions, is that expenses connected to future pensions will be reduced if compared with a situation in which the present scheme is maintained. Moreover, a universal right to an occupational pension will be introduced on 1 January 2006. Companies without occupational pension schemes will thus be obliged to introduce such schemes. The broad compromise behind the parliament's resolution suggest that changes to the state national insurance pension scheme will not be an important issue in the run-up to the general election in the autumn 2005. Proposed alterations to the national insurance scheme will take effect from 2010, by which time a number of deliberations and legal changes will have occurred.

Political compromise on main principles

On 27 May 2005, the modernisation of the national insurance pension scheme was discussed in parliament (NO0501102F), culminating in a resolution being carried about the principles to underpin a reform of the system. Prior to parliamentary discussions, agreement on the main principles of reform had been reached between the three parties in the coalition government and two opposition parties. The resolution thus implies a broad political consensus about a reform of the present pension system.

An important feature of the modernised national insurance scheme is a closer link between labour market participation and incomes over a person's life-span on the one hand, and actual pension payments following retirement on the other. All employees will be entitled to a guaranteed pension at the level of the present minimum pension provision, regardless of previous income. However, the pension-related rewards of working will be enhanced in order to reduce the number of employees (over a certain income) on the minimum pension. The compromise means that employees with a low income over many years will benefit more than envisioned in the government’s original model, as well as compared with the present insurance scheme. Every year of employment will count the same towards pension entitlement, and the rewards of employment beyond 40 years will also be increased. Pension rights may also be accumulated through time spent in home care. These provisions will have retroactive effects. Military service will also count towards the accumulation of pension rights. Further, people who are unemployed or in involuntary part-time work will accumulate pension rights. Income above NOK 470,000 a year will not count towards pension accumulation.

The discussions surrounding the shape of a future pension scheme have been coloured by the aim of achieving greater incentives to work, while at the same time upholding 'distributive' considerations. Thus the system will reward longer-term employment, while also providing pension rewards for care-related work, such as childcare.

In order to reduce future pension costs, a number of features will be introduced. One important such feature is the principle that the implication of an increase in average life expectancy is that employees will have to stay longer in employment in order to receive the same level of pension payment. Another important feature is the indexation of pensions to a calculated average of wage and price growth. As a consequence, income developments among pensioners will be not as high as those of wage earners.

Public sector occupational pension schemes will be continued in their present form. These schemes provide employees with a pension equivalent to two-thirds of the income received at the end of employment. Public sector trade unions have long worried about changes being made to these arrangements. Although the two-thirds compensation level has been maintained, parliament is of the opinion that these schemes must also be covered by indexation and adjustments to increases in the average life expectancy. Such changes, however, will occur in negotiations with the unions. The rules allowing certain groups of public employees to retire earlier than other employees will also be subject to review.

Another central issue in the discussions has been the extent to which the agreement-based early retirement scheme (AFP) is to be maintained. This allows employees in companies bound by collective agreements to retire at the age of 62. The scheme is partly financed through state contributions, and the government, as well as the committee that recently examined reform of the national pensions system (NO0402101F and NO0501102F), initially signalled its intention to replace this contribution with a more general (and less lucrative) arrangement through the national insurance scheme. Now, however, parliament assumes that a future pension system must take as its point of departure the present early retirement scheme. Thus the trade unions and opposition parties seem to have won a significant victory in relation to early retirement. The AFP is to be renegotiated in connection with the 2006 collective bargaining round. It is assumed that a new scheme is to be made applicable to all employees.

Compulsory occupational pensions

Parliament also adopted a resolution to introduce universal occupational pension cover from 1 January 2006 and outlined the guiding principle of such a system. The occupational pension issue arose in connection with difficulties over the topic in the 2004 collective bargaining round, to resolve which the government announced its intention to introduce a universal right to an occupational pension (NO0404101N). Following parliament's resolution on 27 May 2005, the publicly appointed Banking Law Commission was asked to present a proposal for an Act relating to occupational pensions. The commission put forward its proposal on 1 July 2005.

Companies will have until the end of 2006 to establish occupational pension schemes, with retroactive effect. Companies may choose between defined-contribution schemes and defined-benefit schemes. A minimum level is also set for the employers’ annual contribution, at 2% of pay (or an equivalent level if a benefit-based arrangement is chosen).

The commission estimates that around 550,000 employees in the private sector are without occupational pension schemes, and as such will be affected by the new legal proposal. Many of these are employed in smaller companies in the private services sector. The scheme is estimated to increase costs in the companies concerned by 2.28%, and the costs of this reform will thus be around NOK 3 billion per year.

Commentary

The relatively broad consensus that exists in parliament about the shape of a new national insurance pension scheme and compulsory occupational pensions implies that the basic characteristics of the future pensions system have now been established. Yet, there remain a number of deliberations and legal changes to be made before the system is in place in 2010. The agreement reached suggests that a majority of the political parties involved attached importance to coming up with a resolution that can receive the support of the present government as well as future governments, and which provides consistency. The consensus about the need to review the present system stems from, among other factors, projected demographic developments entailing increasing number of pensioners and fewer people in employment.

The process towards reaching an agreement has been marked by compromise, during which the government’s proposal has been subject to revision. An important step in the direction of agreement was a resolution adopted at the May 2005 national congress of the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO), in which the principle of adjusting the pension age in line with developments in life expectancy was approved (NO0505103F). The resolution opened the way for negotiations between the DnA - which has close links with the trade union movement - and the coalition government. The opposition parties - and the trade unions - have managed to gain acceptance for a number of important principles, among others the fact that a future early retirement scheme should take as its point of departure the present agreement-based early retirement scheme, but also the fact that the distributive profile of the new scheme is more beneficial to low-wage employees. In return, two central cost-saving measures are accepted: the principle that the retirement age can be adjusted if average life expectancy increases; and the principle by which pensions are to be indexed.

Both trade union and employers' organisations at the central level approve of the basic principles underpinning the new national insurance scheme. Some parts of the labour movement, however, are reluctant about parts of the proposal. Although the main principles have been approved, a number of issues will be placed on the social partners' agenda in the time to come. The shape of early retirement is one, and issues arising from the adjustment of public occupational pension schemes another. Occupational pension schemes may also become an issue in future wage negotiations, partly as a result of trade unions attempting to protect existing schemes against changes or corrosion (NO0505104F). (Kristine Nergaard, FAFO Institute for Applied Social Science)

References: St.meld. nr. 12 (2004-2005) Pensjonsreform - trygghet for pensjonene; Innst.S.nr.195 (2004-2005) Innstilling fra finanskomiteen om pensjonsreform - trygghet for pensjonene; and NOU 2005: 15 Obligatorisk tjenestepensjon, Utredning nr. 13 fra Banklovkommisjonen.

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