Norway’s parliamentary parties this week gave the green light for a new bill which aims to allow pension providers more flexibility in the way they back legacy defined benefit (DB) pension products – a development welcomed by the financial sector.
The Finance Committee of the Norwegian parliament (Storting) on Tuesday issued its recommendation – agreed by a majority of the parties – that the Storting adopt the government’s bill on a flexible buffer fund for guaranteed pension products, including paid-up policies, in the private sector.
The draft legislation provides for the creation of a new type of buffer fund by providers which combines the exchange-rate adjustment funds and additional provisions that they already manage, and can be used to cover negative returns.
Life companies in Norway currently manage 900,000 paid-up pension policies worth NOK330bn (€27.9bn) in total, while members of the Norwegian Pension Fund Association (Pensjonskasseforeningen) manage 110,000 such pensions, totalling NOK110bn.
Stefi Kierulf Prytz, director of life insurance and pensions at financial sector lobby group Finance Norway (Finans Norge), said: “There are currently over NOK330bn in paid-up policies, which are not managed optimally due to the current regulations.
“It is therefore good news for all the country’s paid-up policyholders that the Labour Party, the Centre Party, the Socialist Left Party, the Liberal Party and the Red Party have secured a majority for flexible solutions that can give a higher return on the pension funds.”
The rationale behind the proposal
Explaining the rationale for the proposal, the government said that because active defined benefit (DB) pension schemes in the private sector had largely been closed or discontinued and replaced by defined contribution (DC) schemes in Norway, the number of paid-up pensions had increased sharply, particularly in the private sector.
“At the same time, the current regulations for safe management mean that the pension capital is invested short term, with a low return, which has meant that the paid-up policies have fallen significantly in value in recent years,” it said, adding that the problem was exacerbated by increasing inflation.
Although it was mainly individual pension savers who were being hit, the government said it also meant the products were not very profitable for providers, so competition for customers was almost non-existent.
The government’s current plans
The current legislative proposal involves – in contrast to the situation for municipal schemes – a ceiling on the size of the buffer fund, so accumulated profits above a certain level are allocated to customers at the start of the payment period and gradually reduced.
In the consultation process, however, the Pension Fund Association and others warned against capping the combined buffer fund, saying it would negatively affect pension funds and paid-up policyholders.
The Pension Fund Association had argued for a cap on the combined buffer fund at life companies, but not in the collective pension funds.
In its response to the committee’s recommendation this week, the association noted that the committee said in its recommendation that the Storting was asking the government to set up “a fast-working committee with representation from affected parties” to look at possible rule changes to further secure the values in and regulations of paid-up policies.
“The Finance Committee is naturally understood to mean that they want a possible ceiling investigated in more detail in line with the Pension Fund Association’s input in the hearing,” the pension fund lobby group said.
Both pension funds and the financial sector have in the past bemoaned a previous missed opportunity by the government to institute a buffer model for guaranteed pension products.
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