Norwegian government must reform DC system, report urges
NORWAY - The Norwegian government has been urged to introduce a new pension model, combining aspects of both defined contribution (DC) and defined benefit, to reduce the market risk scheme members must endure.
Written by the country's Financial Crisis Commission, the report examines ways in which Norway could be better prepared for future global financial instability.
Suggestions include closer cooperation with other Nordic financial regulators, as well as monitoring systemic risk more effectively.
The report noted that close to 1m employees are currently enrolled in DC schemes in Norway, with the investment risk borne by members rather than the employer.
"The Commission proposes that the government set the stage for alternative products that allow combinations of properties from both defined contribution plans and defined benefit plans," it said, noting that international interest rates were expected to remain low for several years.
The risk exposure of default funds in DC schemes was also an area needing improvement, the report said.
It urged that, with increasing age, members should see their risk exposure reduced.
Such a tactic is already common in some schemes in Sweden, with target-date funds changing their risk profile automatically as members approach the chosen retirement age.
However, despite suggestions that systemic risk be more closely monitored in the banking sector - with counter-cyclical funding measures suggested as one alternative - pension funds were generally praised.
Authors noted the crisis had "not identified a need to change the Norwegian regulation of insurance companies and pension funds with regard to financial stability considerations", instead only pointing to potential problems facing the life insurance industry.
Norway's minister for finance Sigbjørn Johnsen said he welcomed many of the report's suggestions, conceding that closer cooperation with Nordic regulators was in the cards.
"Common cultural and social features, language and a high degree of economic integration, especially with respect to financial markets, means the Nordic countries are in a good position to cooperate on regulation," he said, adding that any cooperation would also include working with regulators across Europe.
Other suggestions included guaranteeing information provided to scheme members employed consistent terminology to allow for easy comparison, thereby reducing risk due to higher financial literacy.