Norway: Getting to grips with longer life expectancy
Pension providers are adapting to the challenges of people living longer and continuing low interest rates.
Regulation in summary
• A new Financial Institutions Act, passed in April 2015, will bring all financial institutions under the same statute.
• Details of Solvency II implementation have been proposed and put out for comment.
• Low interest rates might mean more than 20% of increased provisioning must be met from equity; 10-year bond yields have already fallen well below the maximum rate that can be used by life insurers to set new contracts.
• Legal changes in the Company Pensions Act allow paid-up pension policyholders to convert to a unit-linked policy.
The new Financial Institutions Act, an important piece of legislation for pension providers in Norway, was enacted in spring 2015, and will come into force in 2016. The new law is a portmanteau statute covering all financial institutions and, while it broadly continues current rules, it also takes account of new EU legislation, such as the Solvency II Directive for the insurance industry.
Regulatory details surrounding the implementation of Solvency II – due to come into force in 2016 – have been proposed by the financial regulatory authority Finanstilsynet and circulated for comment.
Pension providers are having to make extra provision for their future liabilities because people are living longer, while new mortality tables became effective in Norway on 1 January 2014. Institutions are allowed to use surplus return and surplus on the risk profit to increase provisioning for up to seven years, but at least 20% of the increased provisioning must be met out of equity.
Earlier this year, Finanstilsynet said that because of current low interest rates and the prospect of little return beyond the guaranteed rate, the contribution from equity might have to be higher than 20%.
In April, the Banking Law Commission (Banklovkommisjonen) delivered a report concluding its work on adapting pension laws in the private sector to the social security reform. It was looking into whether it was possible to establish a form of defined benefit (DB) retirement pension for the private sector that is adapted to the new old-age pension in the national insurance scheme.
While the report included draft legislation that showed it was possible to create a new form of DB pension, the commission’s members disagreed on some key issues, including whether implementing new legislation on DB products would be a good thing to do.
These new considerations come in the wake of the 2014 framework for pensions which allow for a new type of hybrid pension designed to ease the cost of providing DB pensions, while at the same time preventing a large-scale exit from DB to defined contribution. The new system offers lifelong pensions, but allows payments to be reduced as life expectancy increases.
Low interest rates have been causing problems for pension providers, so in the summer of 2014 the maximum interest rate available to life insurers for new life insurance and pension contracts was cut to 2% from 2.5%, effective from 1 January 2015.
However, Finanstilsynet pointed out in its 2015 risk report that interest rates had fallen further since that decision was taken. At that point, the 10-year government bond rate was 2.5%, but by the end of 2014 it had fallen to 1.6%.
Changes in the Company Pensions Act, which applied from 1 September 2014, allow policyholders to convert a paid-up pension policy to a unit-linked policy. Finanstilsynet said this may dampen the increase in pension providers’ paid-up policy portfolios in the long term.
The Act imposes requirements on what an investment portfolio can include and on what information and advice need to be given before the policyholder agrees to a conversion.
The Ministry of Finance has also decided that paid-up policies have to be fully provisioned for longer life expectancy before they can be converted.
This spring, new rules were put in place regulating the framework and rules for disability pensions, contained as a new chapter in the Act on Collective Service-Pension Insurance, which came into force on 1 January 2014.
The new rules will become effective on 1 January 2016, with the Ministry of Finance setting out transitional rules later in 2015. A key principle is that the rules support the ‘stay-in-work’ policy, meaning they should encourage and enable the individual to return to work.