Social partners agree on wage rise and early retirement conditions

In April 2008, the Norwegian Confederation of Trade Unions concluded agreements with the Confederation of Norwegian Enterprise in the manufacturing, construction and parts of the private services sectors. The outcome of this year’s collective bargaining round in these sectors will generate a total wage growth of 5.6% for 2008. The social partners also managed to reach agreement on a revision of the agreement-based early retirement scheme – AFP.

On 2 April 2008, the Norwegian Confederation of Trade Unions (Landsorganisasjonen i Norge, LO) and the Confederation of Norwegian Enterprise (Næringslivets Hovedorganisasjon, NHO) reached agreement on a proposal (in Norwegian) for new collective agreements in large parts of the private sector. The proposed collective agreements, which will run for a two-year period, cover the following sectors: manufacturing, construction, as well as private services such as transport, and hotels and restaurants. In addition to pay, the agreement-based early retirement scheme, AFP (Avtalefestet pensjon), was also an important issue on the bargaining agenda in this spring’s negotiations. Meanwhile, NHO and the Confederation of Vocational Unions (Yrkesorganisasjonenes Sentralforbund, YS) concluded a similar agreement as a result of negotiations which ran parallel to those between LO and NHO. The proposal has been subject to a ballot among the LO and YS members who are covered by the collective agreements in question. In all, 71% of LO members and 78.5% of YS members voted in favour of the proposed agreement.

Pay provisions

LO and NHO agreed on a general pay rise of NOK 2.00 (€0.25 as at 26 May 2008) an hour. In addition, the agreement provides for a low-wage increase of NOK 3.00 (€0.38) an hour which will be awarded to workers in economic sectors with a low average wage – that is, an average wage below 90% of that in the manufacturing sector. According to LO estimates, 25% of workers covered by the relevant collective agreements will receive the low-wage increase, and almost half of all women in the sectors covered by the agreements are eligible for such a low-wage increase. The wage increase took effect on 1 April 2008.

The 2008 wage settlement is expected to generate a total wage growth of 5.6% between 2007 and 2008. This wage growth figure includes so-called ‘wage carry-over effects’ from 2007 – that is, the effect of wage increases awarded in 2007 on wage growth rates for 2008 – and the 2008 wage increases, as well as a wage drift. The latter will mainly come in the form of pay increments provided for in company-level agreements which complement those reached at central level in large parts of the private sector.

Agreement-based early retirement

The AFP scheme was probably the most difficult issue to negotiate in the 2008 collective bargaining round. The broader reform of pension arrangements within the national insurance scheme from 2010 onwards called for a total revision of the current AFP scheme (NO0611019I, NO0507102F; see also the government’s online information on the pension reform (in Norwegian), as well as the summary of the White Paper No. 5 2006–2007 on a new model of earning and drawing of old age pension in the national insurance scheme (Summary, 102Kb PDF)).

One of LO’s main demands in relation to the 2008 wage settlement was to continue the present levels of contributions to the AFP scheme. Moreover, the government was also committed to continuing the AFP scheme. Nevertheless, it was evident that the present scheme had to be subject to substantial changes due to the general reform of the national insurance scheme. Both the content and levels of pension contributions were subject to negotiations; hence, the government’s position and contribution became central to the outcome of the bargaining round.

Main provisions

The agreement contains the following main provisions in relation to the AFP.

  • The AFP scheme will be maintained and workers covered by the scheme, who have accumulated the required amount of pension rights, may choose to retire through the scheme at the age of 62 years.
  • For those who choose to stop working at the age of 62 years, pension benefits which are calculated proportionally to the pay level will amount to more than the present levels in the year 2010. For those who choose to continue working until the age of 63 years or later, the level of pension received will be higher than today.
  • AFP is established as an individual right. It is up to the individual to decide when to retire through the scheme. Moreover, an AFP supplement to the ordinary pension will be awarded even to those workers who decide to continue working until the ordinary pension age of 67 years.
  • The AFP supplement is ‘neutral’ in that complementary benefits will increase relative to the length of employment beyond the age of 62 years. Moreover, workers who have chosen to retire early through the AFP scheme will be able to continue working, for instance, in a part-time job, without any reduction in the pension paid.
  • The changes in pension benefits which result from the new life expectancy adjustments in the reformed national insurance scheme will be compensated through the AFP scheme for all age cohorts born before 1953, and a partial compensation is awarded to workers born in the period 1954–1962.
  • The new AFP scheme is to be subject to an evaluation in 2017.

Coverage of AFP scheme

The AFP covers all workers in companies associated with the scheme, which means almost all companies with a collective agreement in force. The agreement between LO and NHO assumes that a joint scheme will be established for the entire private sector; in this case, bargaining areas outside the LO-NHO coverage would also be included in the scheme. Today, several AFP schemes exist. The most important change relates to the fact that all workers covered by the scheme will receive an AFP supplement: those workers retiring after the age of 62 years, thus not having access to AFP pension benefits at the age of 62 years, will receive a larger annual amount than those retiring early. In the present scheme, only those workers who retire before the age of 67 years are entitled to receive benefits from the AFP scheme.

Significantly higher contributions required

The new AFP scheme requires substantially larger financial resources than is currently the case. For the social partners, more specifically for the employers, the costs will remain at the same level as in the current AFP scheme: the employer’s contribution takes the form of a premium calculated on the basis of the company’s total wage costs. In contrast to the present scheme, the new scheme does not require any complementary premium at the cost of the company in cases where a worker decides to retire before the age of 67 years. However, the state’s contribution to the new scheme will be significantly higher than what is being paid into the present scheme. One estimate in this regard suggests that it will amount to as much as NOK 100 billion (€12.7 billon) over a 40-year period.

Commentary

There was significant suspense associated with the 2008 wage settlement, and in particular the extent to which the social partners would be able to reach an agreement on the future shape of the AFP. A joint social partner committee set up in 2007 (NO0707019I) failed to foster agreement on a draft model of the new scheme, which meant that a solution had to be found in the course of the bargaining round. A new AFP scheme also required the participation of the state. In this case, the government had to foster support for a new AFP scheme among the opposition parties in the Norwegian parliament (Stortinget), since the reform of the national insurance scheme is based on a broad political compromise in parliament.

The agreement reached on a new AFP scheme has been particularly influenced by the present Labour-led coalition government’s willingness to provide substantial financial support for the scheme. The government, however, managed to retain some important principles, including that the pension system and the AFP scheme shall encourage workers to stay as long as possible in employment beyond the age of 62 years, either in full-time or part-time employment.

The agreement on the new AFP scheme has been criticised by the opposition parties in parliament for being too costly for the state, as well as being considered too exclusive in that only those workers covered by collective agreements are entitled to AFP pension benefits. Overall, the trade unions welcomed the agreement, although some criticism has been raised among shop stewards at company level. One such criticism has been directed at the fact that only workers born before 1962 are entitled to compensation for life expectancy adjustments made to contributions from the national insurance scheme.

Both sides have expressed satisfaction with the economic result of the negotiations. While LO emphasises the low-wage orientation of the agreement, NHO underlines that the agreement has been reached within ‘reasonable costs’. The outcome of this year’s bargaining round is to a great extent a reflection of the relatively prosperous economic situation in Norway at the moment, with a low unemployment rate and an overall profitability of most Norwegian industries.

All major collective agreements in Norwegian working life are to be renegotiated in the course of the spring of 2008. The LO-NHO agreement will have a significant bearing on the results achieved in other sectors of the economy.

Kristine Nergaard, Fafo Institute for Applied Social Science

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