Pension reform to favour longer time in employment

In October 2006, the Norwegian government presented a white paper on a new pension system, to be established from 1 January 2010. The white paper follows on from the broad compromise reached by parliament in the spring of 2005. Moreover, the government has also put forward a resolution which will facilitate a continuation of the controversial early retirement scheme.

In October 2006, the Norwegian government presented its proposal for a new pension system. Participation in employment will have a greater role in determining pensions, and older employees are to be rewarded for staying longer in working life. Nonetheless, the new system also proposes to continue the state’s contribution to the early retirement scheme or ‘agreement-based flexible pension’ (AFP), although in a different form.

Closer link to employment participation

Among the main features of the new pension system are the following:

  • A pension guarantee scheme is introduced applicable to all employees. All income from paid work will contribute to increasing pension payments beyond the minimum level of the guaranteed pension.
  • The accumulation of pension rights is calculated on the basis of each year in employment. Thus, employees who remain in employment for longer will benefit more than those with a shorter working career. Even income from low-pay work would count more than not being employed.
  • Annual pension accumulation will correspond to 1.35% of the annual income from employment. The individual pension accumulation ceiling for 2006 is proposed at NOK 440,000 (€54,390 as of 22 January 2007). This ceiling means that income above the set level will not be included in the pension calculation; the threshold will be adjusted annually.
  • An early retirement scheme applicable to all employees from the age of 62 years is to be introduced. However, taking early retirement will entail considerably lower pension payments than if the employee decides to stay in employment until the age of 67 years, which is the standard pension age according to the national insurance scheme (Folketrygden).
  • Efforts will be made to enable older employees to gradually reduce their employment participation rate, for example by working part time, and to combine their work and pension. Furthermore, income from work for pensioners will in the future not lead to a corresponding reduction in pension payments, as is the case today.

Financing of new pension system

The cost of the new pension system is a key issue. The government white paper includes the following measures:

  • Pension payments will be attuned to changes in the average life expectancy rate. If people’s life expectancy rate increases, employees will have to stay longer in employment to be entitled to the same pension, or accept lower pension payments. This means that total state pension costs will not be affected by changes in life expectancy rates.
  • Pension payments are to be regulated on the basis of a calculated average of annual wage and price growth. This means that pensions will increase at a slower rate than the income of ordinary wage earners.
  • A pension fund will be established by merging the National Insurance Fund (Folketrygdfondet) and the Government Petroleum Fund (Petroleumsfondet). Together, these two funds are estimated to amount to NOK 2,000 billion (approximately €247 billion) in 2007.

Other features of new system

  • No distinction is drawn between single and married couples/partnerships with regard to pension accumulation in the national insurance scheme. Moreover, no distinction is made between the sexes, even though women, on average, tend to live longer than men.
  • Care responsibilities for children or elderly, sick or disabled persons also lead to pension rights accumulation. However, the new system proposes to reduce the period during which pension is accumulated in relation to childcare, from seven years to four years.
  • The transition from the old to the new system will take place in incremental steps. New regulations will be introduced from 1 January 2010, but the new rules regarding pension accumulation will be fully applicable only to persons born in 1965 and later.

Agreement-based early retirement

One of the more difficult issues that has arisen in relation to pension reform concerns the AFP. Such schemes are only applicable to employees in companies covered by a collective agreement. It is estimated that just over three out of four employees in the relevant age group are entitled to early retirement through the AFP, and several slightly different schemes exist. The AFP scheme is partly financed through an employers’ fund – in other words, financed by the employer – and partly through state contributions.

The scheme has been criticised for encouraging employees to leave working life before the standard pension age of 67 years. However, trade union organisations, particularly the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO), have called for a continuation of the scheme. In the pension compromise reached in 2005 (see below), the scheme was continued, the age limit at 62 years was retained and the state’s contribution was maintained at current levels. In connection with the wage settlements in the spring of 2006, Prime Minister Jens Stoltenberg advised that the state’s contribution to the scheme would be continued until the end of 2009 (NO0604019I).

The government white paper explains how the state’s contribution to the AFP may be continued. The state contribution should have a neutral outlook in income terms, making no distinction between those who decide to leave work and those who decide to stay in employment for as long as possible. It will be paid regardless of whether the employee decides to leave before the age of 67 years – and as such receive a lower annual pension – or to stay in employment until the age of 67 years, thus being entitled to a higher annual pension. All employees subject to the AFP will receive a supplementary pension regardless of whether they decide to leave early before the age of 67 years. Currently, only those who choose to leave early benefit from this arrangement.

The government aims to come to an agreement on a new AFP scheme before the 2008 wage settlement. As part of such an agreement, the state’s contribution to a new scheme is to be made statutory. A final resolution of the AFP issue assumes that agreement will be reached on the issue between the social partner organisations. Although the design of a future AFP scheme will ultimately be a bargaining issue between the relevant trade unions and the employer organisations, the government presupposes that it will be founded on the main principle in the pension reform, namely the incentive to stay in employment for longer.

Path to new old age pension

The white paper was due to be considered by the Norwegian parliament (Stortinget), after which the government would present a proposal for legislation on a new pension scheme. Changes to relevant legal provisions will also have to be undertaken. Furthermore, occupational pension schemes in the public sector will need to be adjusted. These schemes will guarantee public sector employees a gross pension of 66% of their final salary, on condition of sufficient accumulation of pension rights.

The schemes will, according to the government, be continued more or less in the same form as they are today. However, these kind of annual pension payments are to be adjusted on the basis of the average life expectancy rate as well as a calculated average of wage and price growth. Public sector occupational pensions are agreement-based arrangements, and therefore adjustments need to be made in close cooperation with the social partner organisations. The pension reform also involves the introduction of a compulsory occupational pension for all wage earners. From 1 January 2007, all companies must have such schemes (NO0404101N, NO0507102F); the legal framework had already been established in this regard.

Commentary

The reform of the Norwegian pension system is one of the country’s largest welfare reforms ever, and follows a long period of comprehensive deliberation and political negotiations (NO0209103F; NO0402101F). The present majority government has signalled that it wants to see the broadest possible compromise being reached on the new pension system. The proposal now being placed before parliament is itself based on a comprehensive compromise on the principles of a new pension system, which was reached in 2005 between the government at the time and the largest opposition party, the Norwegian Labour Party (Det Norske Arbeiderparti, DnA) as well as the Centre Party (Senterpartiet, SP) (NO0501102F).

In the autumn of 2005, a new government was elected in Norway (NO0510103F), and the present proposal is now being advanced by a coalition government led by DnA. The opposition parties have called for changes in several areas. The possibility of tax deductions on individual private pension savings funds has been raised. The option of making this type of deduction was abolished in May 2006 – a move which was met by strong criticism from the opposition parties. Assuming that a compromise for a new pension system is reached, the government has pledged to reintroduce this opportunity in the legal framework. Several parties are also critical of the ceiling at which employees stop accumulating pension rights, which in the new proposal is set at NOK 440,000 (€54,390). Moreover, parts of the opposition have criticised the proposed reduction in the period during which childcare generates pension rights.

Overall, however, the social partners seem to be satisfied with the main principles for a new pension system. Nevertheless, several employee and employer organisations want to see the wage ceiling for pension accumulation being raised from the proposed level. Trade unions representing groups with higher education are critical of the fact that the government does not propose to allow for accumulation of pension rights during education.

Reference

Opptjening og uttak av alderspensjon i folketrygden (in Norwegian, 2.6Mb PDF), St.meld. No. 5, 2006–2007.

Kristine Nergaard, Fafo Institute for Labour and Social Research

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