Historically, retirement plans in Norway have been predominantly defined benefit but legislation that came into effect on 1 January 2001 now permits tax qualified defined contribution plans. One of the stated goals for this new law is to encourage pension provision for the 1m or so Norweigan workers without any form of occupational retirement benefits.
To secure tax-favoured status, DC plans must comply with some new regulations as well as those that already relate to DB plans. Some of these are summarised below:
q All employees at least 20 years old and working at least 20% of normal time must be covered. When eligible, there is no waiting period.
q A plan must have a retirement age not lower than 67, with some occupations prequalified for a lower retirement age as an exception. There are no general early retirement options. Vesting is a maximum of 12 months.
q Benefits must be taken as an annuity, with a minimum duration of 10 years. Lump sum payments are not allowed.
q The maximum contribution rates for DC plans depend on the basic amount (B), a term defined in Norwegian pension legislation. Effective 1 May 2001, B is equal to NOK51,360 (e6,600). The DC limits are as follows: for a salary amount two to six times B, maximum contribution 5%; salary amount six to 12 times B, maximum contribution 8%.
q Over time, the actual annual contribution may vary within a corridor of ±25% of the base contribution rate.
q Additionally, there is a provision that the contribution rate for salary in excess of six times B may not be more than twice the applicable rate for salary up to six times. The resulting annuity is also subject to a cap.
q The law permits plans to provide higher contribution rates for women to ‘compensate’ for their average longer life expectancy, and a publicly appointed working party has recently proposed to make this compulsory. Each individual member may be permitted to exercise investment choice or the DC plan may use a collective investment pool (which must provide for security and a minimum rate of return). Legislation that recently came into effect allows for a third investment option, whereby the investment decision is made by the employer. In establishing the pension plan, the employer has discretion to decide which option shall apply.
q A DC plan may be supplemented by death and disability benefits. Such ‘risk benefits’ must be explicitly determined according to a DB formula embedded in the plan. Death and disability benefits must be paid as annuities.
Employers wishing to switch from DB to DC have a number of options in dealing with the prior DB plan but, interestingly, the DB plan cannot be rolled directly into a new DC plan.
These new pension rules in Norway give employers added flexibility when providing retirement benefits and are expected to encourage many companies, particularly the smaller ones, to establish retirement plans for the first time.
Pål Lillevold is consulting actuary with Aktuarene, the Norwegian member firm of Milliman Global