Coming under the umbrella
Hasse Nilsson speculates on the effects of Norway’s new pensions law
Around 1m Norwegian wage earners continue to rely almost entirely on ‘Folketrygden’ – the first pillar of the Norwegian pension system, for their retirement age of 67.
Out of a total working population of 2m people – and a total population of around 4.3m – there are 1m employees with no additional employment pension. They can be characterised as poorly trained, low-paid, primarily female – blue collar workers, employed with smaller companies located in the rural districts. As a consequence, new legislation expected to be accepted by Parliament this year with and effective from January 2001, aims at the creation of numerous corporate sponsored plans to bring in this large marginal group under the umbrella of supplementary retirement provisions.
Hitherto, supplementary pensions have been defined benefit schemes (DBS) only, but the new legislation includes the possibility for establishing defined contribution schemes (DCS), either stand-alone DC plans or alongside existing DB schemes. So far no final decisions on the size of contributions hace been made, but a ceiling in the range 5-7% of annual salaries seems likely, and to be paid entirely be employers. Existing schemes typically involve employer contributions of between 8-10% of salaries. This is significantly lower compared to neighbouring countries Denmark and Sweden, where total contributions – from employer and employee – are in the range of 10%- 18%. In Norway, however, there is no tradition for negotiating both wages and pensions under the system of collective bargaining.
Norwegians have experienced a decade of a rapidly changing environment of the domestic capital market. Deregulation has accelerated, although not at the same pace as in Denmark and Sweden. In 1993, institutional placing rules for pension funds were lifted to allow foreign investments, following a similar deregulation for life insurance companies a few years earlier. In the wake of a severe banking crisis at the beginning of the decade, banks have slowly recovered and re-privatised. They survived being strongly challenged by other Scandinavian banks, who eyed the chance for building a strong foothold in Norway during those crisis years. Swedish SE-Banken and Handelsbanken have both won significant market shares in the fields of private and corporate banking as well as for asset management services.
The institutional sector has not been left undisturbed either. A number of domestic mergers between banks and insurance companies have surfaced. Christiania Bank & Kreditkasse took over Norske Liv Life Insurance and may merge with Merita/Nordbanken/Unibank, Den norske Bank acquired Vital Life Insurance, Landsbanken merged with Samvirke Insurance to become Vår Bank & Insurance, who subsequently was taken over by Sparebanken 1-Group; and Gjensidige Insurance has acquired NOR Life Insurance. During 1999, a cross-border merger of Storebrand’s non-life operations with Swedish Skandia’s was announced.
Parallel to the concentration of power within the private financial sector, the public sector set a new trend with the institutionalisation of Norwegian foreign exchange reserves, primarily stemming from the state’s dominant role in the oil-sector, into Statens Petroleumsfond. This may well be regarded as a buffer fund or a ‘national pension fund’ for all Norwegian citizens, with total assets of roughly $30bn (E30.1bn). Contrary to the asset allocation of Norwegian pension institutions, Statens Petroleumsfond invests in international securities only, prefering to outsource the bulk of assets to international asset managers.
A minimum annual state pension of approximately $10,000 is paid to all citizens from the age of 67, in addition to an income related pension. As the state pension(‘Folketrygden’), in principle is an un-funded PAYG-scheme, the Parliament decided to establish a ‘buffer’ in the early 1970’s – ‘Folketrygdfondet’. Over the subsequent years, this ‘National insurance scheme fund’ received an ear-marked contribution from the Inland Revenue, which was then terminated in 1989. Folketrygdfondet no longer receives contributions nor is tapped for retirement benefits, but accumulations from former contributions and investment returns have created a total asset base of roughly USD15bn. The future fate of the fund is still unclear, but it seems likely to play a major role, should Parliament decide to convert un-funded state pensions into a pre-funded scheme.
Folketrygdfondet may place up to 20% of assets in Norwegian equities, while the bulk of assets are placed in domestic bonds and money market instruments. So far, the fund has not been permitted to diversify assets internationally, apart from stocks of foreign companies listed on Oslo stock exchange.
The second level of Norwegian retirement provisions comprises various mandatory occupational schemes, topping up state pension benefits in the form of DCs offering between 60-67% of final salary levels including the state pension, depending on actual years of service. Conventionally, maximum pension benefits are conditioned by 30 years of service.
Public sector occupational schemes include employees of central administration – continuously a PAYG-scheme – and employees of local governments (kommuner). The latter are fully or partly funded schemes with the majority of contributions paid by the employer. By 2005, all funds are required to be fully funded. Approximately one third of local governments (25) – including larger city municipalities – maintain proprietory pension funds, while the majority are insured schemes with the municipalities mutual life-and pension insurance group KLP-Forsikring.
Private sector occupational schemes show similar characteristics, in as far as most schemes are insured with private insurance groups (80%), although 136 corporate plan sponsors are members of Norske Pensjonskassers Forening – the Norwegian association of private pension funds. Cross-industry pension funds found in Denmark, Finland and Sweden, are rare species in Norway.
In addition to mandatory schemes, a number of corporate entities have established supplementary and voluntary arrangements with separate funds. However, private life-insurance companies and banks dominate the voluntary and supplementary pension savings market.
The new legislation expected to be passed this year is an additive to the private sector second pillar, where at present only 35% of private sector employees enjoy retirement provisions beyond Folketrygden. Introducing the possibilities of establishing DCs for the first time, there are various options for the wrap-around for sponsors. The first option is to establish a pension foundation with proprietory administration and management – which does not seem meaningful from an asset allocation and cost perspective. Start-up reserves would be inferior to achieve an appropriate asset allocation, and administration and management costs would be unjustifiably exorbitant on a relative basis. The second option is to outsource the scheme to be administered and managed by well established insurance groups, which are already dominating the market place, and who could guarantee a minimum return as well as provide cover for a reasonable asset allocation. The third option is outsourcing to banks and/unit trust asset management Groups, providing for the pure savings element, and purchase separate insurance cover for death and disability.
It remains to be experienced, whether the new legislation will actually lead to the objectives wanted, or whether only sporadic enhancements will occur. To the outsider, it certainly seems as if Norwegian pension professionals and parliament has disregarded the many years of experience and learning by their foreign neighbours in establishing a well-functioning and comprehensive pension system seeking to maximise returns - net of costs, to the benefit of the individual future retiree! The Danish labour market funds established in 1991 and 1992 should be an example to follow. But then again, as with EU, Norwegians tend to do things their own way.
Hasse Nilsson is chairman of consultants Alcifor, in Denmark