Legislators - they'll be back
During 2004, there has been a high level of activity about the future pension systems for Norwegians. Different proposals have been put forward to improve the first and second pillar pension systems.
Last autumn the Pension Commission chaired by the former Minister of Finance S Johnsen of the Labour Party, came up with a proposal for a new social pension system, ‘Modernised Folketrygd’, which should reduce the tax burden of the social security system on a decreasing work force to fund the increasing number of pensioners. The commission with a narrow mandate proposed a new system that should start in 2010.
The reduction of benefits is estimated to come to 10-15% of the current Folketrygd, Norway’s first pillar pension provision system. The benefits will be more closely linked to the number of years worked and the penalty for early retirement (before 67) will be based on actuarial cost. People will be promted to work longer to receive higher pension benefits - the so-called “working line”. The pension benefits will be cost - of -living adjusted based on consumer price indices and average wage increases rather than today’s system of wage increases only. It also suggests that for each new age group of retire’s , the total earned benefits will be divided by the years of group life expectancies to keep the costs independent of the number of years the pensioners are expected to live.
The commission suggests that everyone will receive guaranteed pension benefits of about NOK 100, 000 current money and a supplementary element where the amount is based on numbers of years worked and the salary level. Maximum yearly benefits will have a ceiling of about NOK 210,000.
Many find these proposals unsatisfactory. The labour unions do not want to change the current system , rather they want to improve the existing Folketrygd benefits. Others are running to life insurance companies to discuss their saving plan. Towards the end of last year, life insurance premiums have increased by 43% on a year to year basis – most of it in individual pension.
In 2000, two new occupational pension product laws passed the Storting for implementation in 2001. The main issue was that for the first time DC plan contributions were made deductible for tax purposes. DC plans had a slow start in the financially difficult years from 2001 to 2003, but last year it seems to have picked up in popularity among the smaller firms. Only a few large firms have converted their DB plan to DC plan – some after directions from their foreign parents.
Earlier in 2004, during the difficult wage negotiations the government promised to avoid labour conflicts by putting forward forward a proposal before the year-end to introduce obligatory occupational pension for all workers. No information about the scheme has so far leaked from the Ministry of Finance regarding the size of the benefits or the way to finance them. It is likely that the proposal will be a DC-plan with a 2% contribution rate either obligatory for all wage earners or for the wage earners that have no pension plan at all.
The Bank Law Commission, appointed in 2000 and chaired by law professor E Selvig, has worked in parallel with the pension commission and issued several reports covering pension issues mainly about occupational pension schemes. One report issued in 2001 was the base for changes in the law approved by the Storting, which will regulate the way life insurance companies’ provide occupational pensions. To increase the competition among the insurance companies and to make the products more transparent and comparable, the pension product is divided into three main elements, administration, risk coverage and asset management. The asset management covers both investments and issuing return guarantees. Each element should be priced separately and the life insurance companies should present in advance a price list that is comparable between the insurance companies. The legal responsibilities are more strictly defined and the security of the insured is improved. The reserves requirements are adjusted and the funding principle of “no under funding is allowed at any time” is emphasised and should be interpreted literally. No change to equity requirement and the way it is calculated was proposed (Norwegian life insurance companies have the same reserve requirements as the banks – the Basel 1 CAD rules).
The Bank Law Commission will issue a new report that is planned to be the base for new law changes for regulating the pension funds. As traditionally it suggests adopting the same rules which regulate the life insurance companies. The insurance industry has lobbied hard not to allow the pension fund to get more favourable rules than the insurance companies. It seams to have succeeded in this respect.
The legislators have adopted the same view as the members of the commission and the senior servants of the Ministry of Finance that it is important to focus on the employees rights and the security of the pension institutions’ ability to meet the pension liabilities. Most of their attention has therefore been concentrated on making defined benefits plans more secure.
Plan sponsors and pension advisers are deeply disappointed that the need for less regulated products and more ‘prudent person’ approach in the investment area has not been addressed. It seams that the pension regulation debate in Norway has chosen a quite different route to the rest of Europe. The occupational pension EU directive of June 2003/41 is not viewed as relevant for Norwegian pension plans as the government has decided to use the more strict life insurance directive of 2002/83 as the ruling directive for all pension plans including those managed by pension funds. The way it plans to escape competition from rule swapping from other institutions with in European Economic Area is by demanding stricter product specifications in order to allow tax deduction for premiums paid. After a recent change in the tax rule there should be no tax discrimination against foreign suppliers of pension services as such, but for the sponsors to receive tax deductions for premiums paid the product specifications must meet the strict Norwegian rules. These specifications are so different from those in other countries in Europe that it may turn out that no one outside Norway can deliver at a reasonable price.
Separate accounting rules quite different from international accounting standards are used to regulate the Norwegian life companies. The new EU accounting directives used for all stock listed companies will not affect Norwegian life insurers as they are organised as companies subsidary within financial corporations. The group has to adopt the IAS standards, but not at the company level. Therefore the insurance companies need not follow the IAS rules. The IAS rules, which dictate that the assets and liabilities shall be valued at market to market prices and that consistent accounting principles shall be used to value similar assets and liabilities, will not be applicable.
The main problems that the DB plan sponsors are facing in my view are those of high pension costs due to complicated products, rigid investment rules and high and flexible reserves requirements. The new changes to pension regulation are not aimed to solve these problems and the new tighter requirements will make it even worse. The effect could easily be that the legislators are improving the DB-plans for fewer employees, as fewer employers will afford to offer it. This will probably facilitate accelerated conversions to less secure DC plans for the employees.
Carper Moller is managing director of Pensjon & Finans in Oslo