Its oil wealth has persuaded successive Norwegian governments that there was no great need for reform of the pension system. However, with an ageing population, and volatile oil prices, it is now time to catch up with its neighbours. Around half of the two million strong workforce continue to rely upon the basic state pension, which is payable at 67, and is valued at approximately e11,600 per year, and a further income related pension.
This is out of a total population of around 4.3m. Many of those who rely on the first pillar payments are in low-paid jobs, or work in the rural districts. The pension provides for approximately 42% of pay, and is a pay-as-you-go scheme, although as part of its current review of the social security system and private pension schemes, the government is considering converting this to a pre-funded scheme.
With this in mind the government has introduced a legislative programme aimed at introducing a number of corporate -sponsored plans to encompass this group, effective from 1 January 2001.
There are a number of mandatory occupational pension schemes. These are defined benefit schemes offering benefits up to almost 70% of salary depending on years of service. An employee could expect to receive a full pension after 30 years of employment.
One of the major aspects of the new legislation concerns the introduction of defined contribution schemes. Initially it was hoped to allow full tax exemption for such schemes, which it is assumed would be attractive to many companies. Until now supplementary pensions have been defined benefit schemes, and the government seems to be keen to retain them, or at least introduce a kind of hybrid scheme.
It is estimated that only 35% of private sector employees have additional pension plans. Under the new schemes employers will make the contributions, and although no decision has been made on the level of contribution it is expected to be in the range of 5–7% of salary. It is likely that most schemes will be some kind of hybrid, since the government wants them to provide benefits in line with the current defined benefit schemes. Those benefits currently amount to around 70% of salary including the state pension element. Typically employers contribute between 8-10% of salary, far lower than neighbouring countries. This is because in Norway there has never been any tradition of negotiating pensions and wages together.
The main difference between schemes in the public sector is that the state operates a pay-as-you-go system, while local authorities schemes are fully or partly funded schemes with the majority of the contributions paid by the employer. Approximately 700,000 Norwegians are covered by the funded schemes. By 2005 all funds are required to be fully funded. Occupational pensions are also provided in the private sector, the vast majority of which are guaranteed through private insurance groups, although the Norwegian
Association of Pension Funds also boasts 136 members. Norwegians may also take out individual pension plans, provided by banks and insurance companies. Almost 600,000 are estimated to have taken advantage of these tax-effective schemes. Minimum retirement age for such plans is 62 years, and the annual premium must not exceed Nkr40,000. Excluding the state funds but including insurance assets the pension assets at January 1999 amounted to Nkr120bn with private plans representing Nkr48bn of that.
When it comes to investing these assets there are a number of restrictions with the most important ones being that only 35% may be held in equities, and 60% in real estate. Equity holdings must not reflect more than 15% of a company’s equity. The funds are notoriously conservative and in the past held mainly domestic bonds and real estate, although equity investment, especially in foreign companies, is becoming more popular and is expected to be encouraged by the new legislation.
It is curious that such restrictions should apply, when the state owned oil fund invests solely in foreign securities, and outsources much of the assets to overseas managers.
The question is whether the new legislation will provide an adequate platform for the reforms. The plan for the defined contribution schemes is long overdue, however the proposed level of contribution from the companies is well below that of employee-employer contributions in neighbouring Sweden and Denmark. Observers believe that the Danish labour funds established almost 10 years ago should be the model for the Norwegian reforms. But with important issues such as the conversion of unfunded state pensions into a pre-funded scheme still clouded with uncertainty it is not certain that the proposed legislation will hit all its targets.
If state pensions are so converted, the State Petroleum Fund, in which Norways foreign exchange reserves are held, will have a leading role to play. Viewed as a “buffer” fund or a “national pension fund” it boasts assets of some US$30bn.
The reason for the caution probably stems from the change and disorder experienced by the local capital markets during the 1990s. The banking crisis at the beginning of the decade, coupled with the economy’s short-term exposure to fluctuations in oil prices, has meant that deregulation, which has been rapid and widespread across the rest of Europe, has been less so inNorway.
Nevertheless, the most important issue is the incorporation of the million or so workers who do not have additional pension provision. As the majority come from the poorest paid sectors it is important that employer-sponsored funds should provide this help, rather than tax incentives for private plans. Parliament seems to have got this right, and the portends are good for the establishment of a comprehensive pension system over the next five years, although it is unlikely to match those of neighbouring states.