Search for consensus
Norway’s parliament hopes to reach a consensus on the main principles of a reform of the pension system by 19 May. The discussions follow the release of a government white paper in December which was based on the findings of a commission chaired by former finance minister Sigbjørn Johnsen that reported in January 2004.
“Currently there is a statutory public system with two pillars,” explains Axel West Pedersen of social affairs think tank the Nova Research Institute. “There is a universal pension and an earnings-related component that mimics the old Swedish system and on top there are occupational pensions.”
“The scheme for those working for the central government is not funded, it’s a pure PAYG system,” says Ola Storeng of the national daily. Aftenposten. “Pensions of those in the municipal sector are funded, in that they pay money into an insurance company, and private companies are required by law to fund their systems, with most contracting them out to insurance companies.”
The white paper proposed changes to the basic state pension with the aim of encouraging higher labour market participation and reducing its fiscal cost. Consequently, while it maintains the principle of a minimum pension for all regardless of participation in employment, it proposes reducing it in line with the ageing of the population, indexing payments to an average of inflation and wages and basing payments on an individual’s lifetime income rather than the best 20 years’ earnings.
In addition, it recommends the introduction of a mandatory occupational pension system. More bravely, it proposes changes to commitments given to public sector workers.
But however controversial, there were hopes that the commission’s recommendations would have a more or less trouble-free passage into law. After all, the commission had included representatives from all major political parties and the white paper had adopted its proposals almost without change.
And the commission had gone over well-trodden ground. “When it was appointed many considered that whatever needed further elaboration had already been elaborated and its main purpose was political coalition building, to make sure that at least parties representing a clear majority in parliament would be behind the changes, not only to guarantee the passage of any legislation but also to ensure it represented a politically stable solution,” says Storeng.
“The motivation behind the Johnsen commission, with the inclusion of political parties, was that people said ‘this has been investigated for such a long time, now let’s go out and do it,” says Alf Hageler, director of the Norwegian Financial Services Association. “And it worked. Almost.”
The first defections came from the flanks of the political spectrum. “When the commission reported, the idea of having a very broad consensus broke down,” says Pedersen. “The first to breakaway was the far-right Progress Party, which insisted on a flat rate basic pension, with the rest being left to whatever private provision they had made. Subsequently, the far-left Socialist Left fell back on its own model based on a strengthened universal state provision, with a flatter curve for pensions, higher at the low end of payments and lower at the high end.”
But then Labour Party chairman Jens Stoltenberg announced that his party was not committed to the committee’s compromise and it wanted to keep its position on various issues open.
This decision came as something of a bombshell. After all, the commission had been established by a Stoltenberg-led Labour government, Labour was well represented on the commission, with two delegates including party vice-chairman Hill-Mater Solberg while other parties had only one, and although Johnsen as chairman was politically neutral, he was a former Labour finance minister. And the Labour delegates had endorsed the Johnsen report.
So what changed? One factor was the electoral calendar. “Although the general election is not due until September the campaign has already started,” says Arne Grande of Norwegian financial newspaper Dagens Næringsliv. “A new factor is that for the first time Labour has formed a coalition with the Centre Party and the Socialist Left to challenge the centre-right government. And the pension system is more or less an issue.”
“The Labour Party saw that for any proposal to have any hope of survival required, in addition to a broad parliamentary consensus, the avoidance of a confrontation with the unions,” says Storeng. “The central trade union confederation, the LO, is moderate by European standards but when the new proposals were released it became evident that the increased actuarial emphasis implied a need to renegotiate a number of rights previously obtained by the unions.”
“When the commission was established the idea was that parliament would decide the main elements of the pension system within this term,” says Hageler. “But with the election approaching and after the Socialist Left’s defection, it became very difficult for Labour to stick to its backing for all the commission’s proposals.”
But it was also clearly difficult to ascribe a change in direction to political calculation so the party has fallen back on a claim that it was not ready.
“Yes, we had members on the commission but the process in the party came after the commission had given its opinion,” says Hill-Marta Solberg, the party’s vice-chairman who was a member of the Johnsen commission and who sits on the parliamentary finance committee that is discussing its proposals. “The party’s internal debate did not go in parallel with the commission. The fact is that the democratic process within the party started after the commission reported its proposals. It was impossible to have an extensive debate with a lot of participants including local party members without concrete proposals on such a difficult issue.”
Johnsen is charitable about the Labour Party’s response: “There are a lot of interest groups trying to put pressure on the Labour Party. But I was aware that you couldn’t from the outset bind the parties because they all had to have a regular internal discussion of the issue.”
Other parties have shown a willingness to slaughter sacred cows in the interests of an agreement. “We accepted the findings of the commission and the government,” says Heidi Larssen, the pensions spokesperson of the Conservative Party, the largest party in the governing coalition. “Initially we favoured more private provision and more private funding, but we lost that point and so we are backing the commission’s proposals and the government’s report because it is important for us that the pension system works better.”
But Labour’s endorsement is vital for pension reform. As well as being the largest party in the current parliament, public opinion polls consistently indicate that the left-of-centre alliance will win the next election and be responsible for enacting the reform. Dagens Næringsliv, which rather than commissioning its own polls averages the findings of six public opinion polls on a monthly basis, reported in mid-April that the Labour Party was set to gain 29.3% of the vote, Socialist Left 15.4% and the Centre Party 5.9%, giving the centre-left coalition 92 of parliament’s 169 seats, and thus a working majority. It found that the current administration – a coalition of the Christian People’s Party, the Liberals and the Conservatives which relies on the support of the Progress Party from outside government – looked set for a defeat, gaining 26.2% of the vote and 42 seats, with the Liberals falling below the threshold for parliamentary representation.
So where does that leave the reform? Well, there is still a clear consensus that changes have to be made, the only question is which ones.
At a mid-April congress the Labour Party clarified its position on which of the commission’s proposals it would endorse. “The congress decided on the indexation of pensions to an average of inflation and wage increases and changes of pension payments to accommodate the fact that people are living longer,” says Solberg.
“These two proposals will account for 70-80% of the savings that can be obtained through a pension reform,” says Storeng. “So they are crucial, and from a purely fiscal perspective if the unions go along with them they will deliver substantial fiscal savings.”
The Labour Party congress “also approved measures to make it worthwhile working and agreed that calculating a public pension on the basis of a person’s best 20 years’ earnings should be scrapped and replaced with a link between income during a whole working life and a pension”, Solberg adds. “But basing pension rights on people’s income during the whole of their working life can be done in various ways. What we are concerned about is the effect of this on those with low and medium incomes and who will need a more social approach than that proposed by the commission. So we will need some changes here.”
And other parties are signalling a readiness to compromise to reach an agreement on principles before parliament is dissolved. “We are very interested in gaining broad support for the pension reform because my party feels it is important that everybody has a good guaranteed pension, including those who do not have 20 good years – those who have very low income and women who stay at home with their children,” says Bjørj Tørresdal, a deputy for the Christian People’s Party and also a member of the parliamentary finance committee. “And we also need a system that makes it worthwhile working longer, that gets rid of an attitude where people say ‘I have worked enough for a full pension’. So we want a system that that changes our attitudes to work and that the trade unions, the Labour Party and the workers consider fair.”
But it is looking likely that the so-called ‘gross terms’ agreements conceded to public sector employees will be retained. “They typically stipulate that an employees pension, including the public old age pension and the supplementary pension from the state or the municipality, amounts to two-thirds of a final salary,” explains Storeng. “And it was calculated in such a way that it amounted to a guarantee. So if the general old age pension were reduced, the state or municipalities would have to make up the difference. A change here would be very difficult for the unions to swallow.”
“Supplementary occupational pensions are offered by most private sector employers, with the employer making payments to an insurer to cover the difference between the amount given by the state pension and up to anything from 60% to 70% of a final salary,” says Hageler. “But if there are changes to the state payments the supplementary pension won’t necessarily make up the difference, it is a net system as opposed to the public sector’s gross system.”
And not all employers offer supplementary schemes. “Small companies, those in the service sector, people working part time, for example, do not have then,” Hageler says. “But now the proposal is that it should be mandatory and that everybody should have a supplementary pension, hopefully by 2006.”
“During last year’s wage negotiations between our organisation and the trade unions it was more or less decided that there should be a compulsory pension scheme in private companies,” says Tor Hersoug, director of economic research at the Confederation of Norwegian Business & Industry (NHO). “The white paper proposed basing it on the present legislation for private company schemes, and that there should be a minimum level of these schemes that would be compulsory. We would like them to be put out to the private market and are trying to avoid the Danish model where employers’ and union representatives run the schemes through non-profit organisations. And we don’t want to have the schemes as part of the wage agreement.”
“Norway is different from other countries,” says Stein Reegård, chief economist at the LO. “Our employers are completely against having this on a collective agreement basis and across enterprises. But in that case it’s not possible to develop good pension coverage. So now we have the commission’s recommendation that there be a compulsory system for those who haven’t established pension schemes, but that they have to build on this company-based system that is very expensive and does not give enough coverage.
“But after the election we will have a number of options, the most likely being the establishing with government help of some broad labour market pension system along Danish lines. What the commission is proposing now is a start, a first step.”
This is not what Hageler wants to hear. “When does a pension fund become a life insurance company?” he asks. “A life company has many customers but the money is handled for the whole group. A pension fund only has one company and there are strong links between the company and the pension fund; that’s their market niche. If they expand, having more companies as customers in the same pension fund, then they become like an insurance company. But there are differences in the regulatory environment, with pension funds having softer regulations than insurers. What we are occupied with here is a level playing field.”
The commission also proposed placing the Petroleum Fund and the Folketrygfondet under a common umbrella and deciding on their role in future pension funding.
“The commission proposed to establish a state pension fund to meet any future shortfall in the state pension budget and that within this the State Petroleum Fund and the National Insurance Scheme Fund, the Folketrygfondet, would operate as separate organisations, says Folketrygfondet director Lars Tronsgaard. “It appears to have been pencilled in that both funds will have some purpose regarding future pensions. The proposal is that both the petroleum fund and the Folketrygfondet should be buffer funds, meaning that they would not have any specific liabilities in an actuarial way. That way it would also be easier for both funds to base investments on portfolio decisions without having to consider any minimum reserve or return requirements very year.”
“The commission’s proposal is somewhat vague,” agrees Pedersen. “It says it wants to rename them as the State Pension Fund, but it didn’t really suggest linking the funds with the pension system proper in any stronger way than they are today, and they are not linked at all. Clearly there is an implicit funding strategy with the petroleum fund, but it’s a funding strategy for the state budget as a whole and it’s not earmarked for the pension system. And the Folketrygfondet is simply a reserve fund for the state budget administered by the national bank. And the pension commission did not suggest ring-fencing.”
“The commission’s point of reference was that the present system is not viable,” says Storeng. “Its hypothesis was that if reform is not carried out now another will be necessary in five, 10, 15 or 20 years and that the later it happens the more brutal it will need to be. But Norway has more leeway in this respect than many other countries because our starting position is so much better. Most European countries face a terrible government debt problem, of around 100% of GDP in Italy, Greece or Belgium. But thanks to the Petroleum Fund we have net assets of 60-80% of GDP, and that’s a terrific difference.”
So, will a meaningful compromise be reached before the election? The Conservative Party’s Larssen, who is the finance committee member leading the proposal through parliament, is optimistic. “I think we will get an agreement about the main principles of the pension reform. Then, the Labour Party will take it with them if they win the election in the autumn, follow the agreement up and present it as legislation. When the legislation is being formulated the Socialist Left might try to shift it a bit but I don’t expect them to start a new war about pensions after the election.”
Out in the cold
A notable absentee from the Johnsen committee on pension reform, which brought together representatives from parties in the Norwegian parliament, was the party that claims to represent the interests of Norwegian pensioners, the Pensioners’ Party. On the surface this was due to its absence from the legislature but its secretary, Per Medtgaard, hints at something darker.
“Our opinions don’t get through to the public,” he says. “We have tried the newspapers and the television, but we don’t get coverage. We are about 5m people in Norway, about 1m of who are pensioners, so we think that they are a little afraid of us in case we start something.”
Sitting in the party’s central Oslo office Medtgaard, a benign-looking, soft-spoken 75-year-old former farmer, does not convey an air of menace. And direct action has not proved much of a threat in the past. The party did try to organise a demonstration outside parliament, he recalls, “but they wouldn’t see us, they just walked away.”
But Medtgaard is right about one thing, the party is not getting its message across. Founded in 1985, it has no parliamentary representation and in the last general election it trailed the field, garnering only 0.7% of the vote.
“We think that today it is a little higher,” he says. “But we are grouped into the ’other’ category – along with four or five others – which all together might amount to 3% to 4% of the vote. But we don’t know who is the biggest and so we don’t know how much support we have.”
However, the party has launched a newspaper, Eldrebølgen (Elderly Wave), of which Medtgaard is also editor, “and that is our hope to get our message across,” he says. It also has a website, www.pensjonistpartiet.no.
So what is the message? “The pension system started in 1967 and during the years 1967 to 2002 NOK2,005bn (e244bn) was paid into the pension system but only NOK1,523bn was paid out,” says Medtgaard. “The remaining NOK482bn, or about NOK500bn today, has been siphoned off to other elements of the social security system, to maternity and child
benefit, sick pay and disability pensions. And old age pensioners have only received 37.2% of the payout. So my pension is NOK45-55,000 a year less than the 66% of my salary that parliament says it should be. They have stolen our money.”
And the Johnsen commission will only make it worse, he says. “Women working part-time will get more and instead of 66% of a final salary pensioners will only get 55%.”
Already there is a great discrepancy in the size of pensions. “Today there are some 208,000 people only getting about NOK100,000 a year. So we have to help them.”
But what can the Pensioners’ Party do? “We are all retired so we have no power to strike,” notes Medtgaard. “And anyway it is not our style. We have discussed taking the state to the European Court of Human Rights. It is very expensive, but who knows?”