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Top 1000 Pension Funds: Hybrid approach at centre of new regime for 2014

Norway’s Banking Law Commission is proposing to replace the present defined-benefit schemes with a hybrid system. Rachel Fixsen reports

Norway will introduce a new framework for occupational pensions in 2014, replacing the existing defined-benefit (DB) regime with a hybrid approach.

The new regime – based on proposals from Norway’s Banking Law Commission – aims to bring occupational pensions in line with the new state pension. This move is considered necessary since the two are linked, with a typical DB scheme targeting a certain level of final pay including the state pension.

While the proposals have been consulted on, at the time of writing they had not passed into law. New hybrid pension products complying with the incoming law are expected to come onto the market in January 2014.

The products will be premium-based, with a guarantee against falls in the value of personal pension assets. At the same time, employers will have scope to make adjustments in step with wage growth.

If the proposal is passed, all employees born after 1962 who have a DB pension will be transferred to a new regime.

They could be moved either to an existing defined contribution (DC) scheme, with higher contributions than current limits allow, or to a new hybrid product.

Employees born before this will be able to continue in their current DB scheme, or receive extra DC contributions if the employer chooses.

The proposals give companies three years from the beginning of next year to make the transition. Public-sector schemes will not be directly affected by the new law.

New mortality tables being introduced by Finanstilsynet will be used by pension schemes to calculate liabilities from 1 January 2014. One effect of this will be to increase premiums for DB schemes.

Asked by the regulator, the financial services association Finance Norway came up with a proposal for a new mortality base table for collective annuity and pension insurance based on updated risk statistics.

Its proposal for the new table – called K2013s – is based on a dynamic mortality base, replacing the current statistical base, K2005. It also includes updates on marital status elements.

Meanwhile, discussions continue on how longevity risk should be handled in the pensions system, since women are considered to more likely to live longer than men. The government has asked Finanstilsynet to prepare a draft law on this.

Its proposal is based on a projection model using a dynamic mortality base rather than the National Insurance scheme’s life expectancy adjustment ratio.

The regulator recommends taking gender into account when managing mortality risk.

The recommendation assumes pension institutions will include gender as a factor when managing mortality risk in order to take account of the big difference between male and female life expectancy. The regulator said this would ensure an identical level of pension benefits for men and women.

But there are concerns that this could lead to higher pension contributions for women than for men, potentially discouraging firms from employing women.

One recent regulatory change has eased the liability burden for some pension schemes. As from January 2013, companies with DB pension funds have been able to calculate their pensions liabilities using the yields of covered bonds rather than those of government bonds.

This accounting standards change was outlined in guidance from the Norwegian Accounting Standards Board (NASB) as part of the IAS 19 framework.

While pension liabilities have long been calculated based on government bond yields under IAS 19, the NASB concluded that the market for covered bonds was now deep enough and the pricing reliable enough for their yields to be used.

In December, the regulator wrote to all pension institutions in Norway urging them to use net profits for 2012 to strengthen their premium reserves, following the changes resulting from the new mortality base.

It stressed that it was inadvisable, on solvency grounds, for companies to use net profits as buffer capital in the form of supplementary provisions, or to write up benefits in a situation where the underlying premium reserves were inadequate.

Twice-yearly stress-test reporting was broadened at the end of December 2012 to all pension funds in Norway which have total assets over NOK2bn (€250m). This increases the number of pension funds reporting frequently to 21 from three previously. The twice-yearly stress tests have been standard for insurers, assessing overall risk against the insurer’s buffer capital.

Stress test I is based on the methodology and assumptions used in the impact assessments of Solvency II, and stress test II is based on current rules.

A proposal to reduce the underlying guaranteed or basic interest rate used for new life and pension contracts in Norway added to potential pressure for workplace pension sponsors earlier this year. A lowered rate would have meant higher premiums for DB pensions.

However, in June, the government’s finance department rejected the regulator’s proposal to cut the rate to 2% from 2.5%, effective from January.

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