Pirkko Juntunen finds that increased flexibility and working for longer are on the cards

After the usual lengthy political processes and some delays, Norway's new pension legislation is now expected to come into force from the beginning of 2011.

The legislation governs the state old-age pension system, Folketrygden, as well as the contractual supplementary occupational pension system (AFP), but additional work is under way to bring other occupational and private pension legislation in line with the changes to the state system.

The government is aiming to increase flexibility in pensions as well as to encourage people to work longer. From the beginning of 2011 the country will scrap the fixed retirement age of 67 and move to a more flexible approach. Entitlement to pension will start at age 62, but can be postponed to 75. For the first time, Norwegians will have the opportunity to withdraw a pension while continuing to work and accrue pension assets. The calculations for state pensions will now also be based on the entire working life, rather than the best 20 years or final salary, as was previously the case.

As a result of the changes, the government asked the banking law commission, Banklovkommisjon, to look into how to bring occupational and private pension legislation in line.

In May, the commission submitted to the finance ministry the first part of a two-part report on necessary changes to laws governing occupational and private pension provision.

The commission proposed amendments to the pension laws governing DC schemes, introducing a similar level of flexibility for employees in these types of funds. This will require only small technical adjustments and updating of the law governing them, according to the commission. Meanwhile, a transitional arrangement allowing flexible access to pension assets, but with no change to the current calculation rules, has been proposed. Most DC schemes already use calculations based on all years of service, rather than final salary.

Beng Olav Lund, business leader for the retirement, risk and finance business in the Nordic markets for Mercer, says the changes will increase the need for individual advice. "Norwegians are traditionally not used to paying for advice," he says.

Most Norwegians seek advice from their banks but the type of mis-selling scandals seen in the UK have also become apparent in Norway; nevertheless Lund is uncertain if fee-based advice will grow, even if the need increases. "The need for advice is not just based on the move from DB towards DC schemes but also because of the introduction of a flexible retirement age. People will have to take on board a lot of new information and think about the different alternatives, particularly as they receive retirement income from several different sources."

Lund is certain that the need for advice will lead to a need for improved dialogue and communication between employers and employees when it comes to negotiating retirement age. "It is vital the companies know when their staff is planning to retire for future staffing requirements. It is equally important whether they decide to retire early or late or stay as part-time employees in semi-retirement."

To supply co-ordinated information, the labour and welfare administration, Norges Arbeids- og velferdsforvaltningen (NAV), was set up in 2006. NAV has a web-based information service and can provide individuals with personalised information about future pensions, for instance.

Because of the complex changes needed to adapt defined benefit occupational pension structures in line with the reformed state system, the banking law commission suggests that these should operate according to current legislation until at least June 2011, when the commission has looked into how best to adapt DB and insurance-based schemes to the laws governing Folketrygden.

Lise Ljungmann Haugen, principal secretary at the commission, believes the complexity of the DB schemes, as compared to DC plans, arises because of the plan design, premium calculation and the close connection of the benefits to the calculation of the public pension. "The changes in the labour market, with an increasing number of people working for several employers in their careers, rather than staying in the same job for 30-40 years as before, warrants a more flexible pension system that reflects the current trends."

The commission will look into how DB schemes, where benefit calculations are based on final salary, can be adapted to the new system with a flexible pension age and calculations based on salaries from the entire working life. The alternative is to wind them down and replace them with transitional schemes until the new ones are finalised.

Rolf Skomsvold, head of the Norwegian Pension Fund Association and a member of the commission dealing with pension reform, believes the outcome will be a uniquely Norwegian hybrid: "A complete transfer from DB to DC is not likely as members and labour unions would oppose these measures and we agree that it would be better to introduce flexibility rather than overhaul the existing plans."

The commission is also looking into the tax deductibility of contributions, which are more generous for final salary DB schemes than for DC schemes. The possibility of introducing life expectancy adjustments into the private sector is another question. The new state system introduced adjustments to curb growing costs for future pensions as people are expected to live longer; in the private sector it is the buffer funds or individuals' capital that has to cover any shortfalls. The adjustments could reduce the risk of cost increases for members.

Norway is also looking to change investment guidelines. Changes in Norway's fairly prescriptive investment restrictions are on the cards for this autumn. The pensions industry is hoping for a step towards the prudent-person rule and ways to invest in infrastructure and other asset classes.

Norway recently lifted the ban on marketing hedge funds to institutional investors. And, as elsewhere in Europe, Norway is preparing for the introduction of Solvency II capital adequacy requirements.