Norway's centre-left government is negotiating with trade unions in an attempt to change a key early retirement programme. The talks are part of a periodic review that is intended to be completed by 1 May.

The current retirement age in Norway is 67 but some occupations have the right to retire at 62 through a state-subsidised early retirement programme (AFP) that is underwritten by employers. The government wants to change the AFP so that those retiring early would see a full actuarial reduction in their state pension.

"There is a move to offer incentives to encourage people to stay in employment longer," says Pal Lillevold, managing partner at consultancy Lillevold & Partners (Aktuarene). "Keeping people in the workforce is very much at the top of politicians' agendas and there are concerns that the AFP is counterproductive to this endeavour. However, the trade unions have existing agreements and they have a strong position in the negotiations so it is very uncertain what the outcome will be."

Before the talks began there was considerable press speculation about the union response. In the past the unions have made it clear that they would consider a threat to the early retirement system as the trigger for a general strike.

However, the negotiations are the latest initiative in attempts by the Norwegian government to put the pension system on a more stable foundation.

Following the report of an all-party commission on pensions chaired by former finance minister Sigbjørn Johnsen in January 2004, the first pillar pension accumulation formula was redesigned so that the level of benefits would be governed by the life expectancy of a cohort, thereby neutralising state finances against increases in life expectancy. In addition, legislation was passed requiring all private sector employers to provide their workers with a minimum mandatory occupational pension (MOP) or obligatorisk tjenestepensjon.

The system, which came into force in mid-2006 with a minimum contribution level of 2% of salary, was designed to provide an occupational pension to the more than one-third of the workforce in the service sector and employment areas often dominated by women, who were not previously covered.

"For employers who did not have a plan in place previously, the typical action has been to adopt the minimum, not more," says Lillevold. "But the MOP has been brought to the market in a rational manner and it is working."

In its first year of operation some 700,000 employees were enrolled in the MOP schemes.

Further support for the initiative came at the beginning of this year when new life insurance legislation made it possible to create multi-employer pension funds. That would enable small companies to pool their efforts to provide pension cover, thereby reducing the costs.

"That kind of legal construction was impossible before," said Lillevold. "I am not aware of any such fund being established but steps are being taken at least in one area, although I am not at liberty to disclose more information at this time.

"But the legislation, which includes the possibility for a non-profit pension fund, is aimed at giving employers a more efficient way to organise themselves and is part of a general overhaul of the regulatory environment to make things more transparent and more competitive."

The introduction of the mandatory pension funds certainly gave a boost to competition. Life insurers, reportedly anticipating competition from the banking sector and the mutual fund industry, priced their MOP offerings very low. As a result companies with an existing DC scheme re-examined the fees they were paying, demanded reductions and began to consider changing provider.

Meanwhile, the government has rowed back on its 2006 withdrawal of tax incentives on third pillar pension contributions. The move was seen at the time as an ideological stand by the two leftist parties in the three-party government - the Labour Party of premier Jens Stoltenberg and the Socialist Left Party of finance minister Kristin Halvorsen.

However, the move sparked opposition from other political parties and shortly after it came into force it became evident that the measure would be reconsidered.

"There are steps now underway to restore the tax incentives, even if on a more moderate basis than in the past," said Lillevold. "But it is expected that any new measure will allow for deductions to be made in personal income tax for contributions."

But the government is not considering restoring a tax incentive on executive pension payments that was dropped at the beginning of last year.