Norway: New buffer fund rules to boost returns

Norway is currently dealing with a range of changes in pensions regulation and legislation. In some cases, new rules are now firmly in place, while in others, debate continues.

On 1 January 2024, new rules on a buffer fund for private guaranteed pension products came into force in Norway that are aimed at creating conditions for higher returns. The buffer fund replaces the current supplementary provisions and fluctuation reserves. Allocated to policyholders, it can be used to cover negative returns. 

Similar changes were brought in for municipal pension schemes in 2022. According to Norway’s Financial Supervisory Authority (FSA), the changes are aimed at promoting competition and helping to generate higher expected returns. 

The watchdog says the changes mean providers of guaranteed products will have more scope for risk-taking in their fund management activities while continuing to safeguard their clients’ returns.

The FSA wrote to life insurers in December 2023 to stress that they must ensure that the changes to the way collective portfolios are managed benefit clients.

Mutual funds and PEPPs

One regulatory development in 2023 affecting pension institutions regards their treatment of management fees for placing client assets in mutual funds.

In December 2023, the FSA proposed to the Ministry of Finance that the regulations be altered to specify that pension institutions’ fees for managing policyholder money in mutual funds should include fees to fund managers. 

The proposal applies to guaranteed products and is similar to the rules governing defined-contribution pension schemes.

The FSA has also made recommendations on how the European Union’s Pan-European Pension Product (PEPP) could be implemented in Norwegian law. The pension product, which is meant for individuals and is not part of an occupational pension offering, was created in 2019. 

Changes to AFP

Changes to the second-pillar contractual pension scheme AFP, which is available in both the private and public sectors, have been on the agenda in Norway for a while.

In the 2018 collective agreement, the Confederation of Norwegian Enterprise (NHO) and the Norwegian Confederation of Trade Unions (LO) agreed on the principles surrounding the AFP scheme in the private sector, which is in the process of changing from an early-retirement scheme to a lifelong supplement to the occupational pension. 

However, the parties have not reached agreement on the implementation and how it should be funded.

There is an intention to make the new scheme, which is administered by the labour-market parties, more financially sustainable and economically beneficial for people to stay in work for longer.

In the public sector, the new AFP for central government employees became law in the spring of 2024, and work has been underway to establish a similar solution in the municipal sector.

“There is an intention to make the new scheme…more financially sustainable and economically beneficial for people to stay in work for longer”

In December 2023, the FSA criticised life companies’ use of amortised cost for guaranteed portfolios within private occupational pensions. Under this method, bonds are accounted for based on original agreed cash flows as opposed to market value.

Nevertheless, this method of accounting is expected to remain an option for Norwegian pension providers.

In recent years, a series of mergers has resulted in fewer and larger municipalities, which has affected the number and size of public pension funds.

Municipal tendering

Norwegian financial group Storebrand’s re-entry into the municipal pensions market is continuing to change the sector as it wins business from municipalities and public-sector companies, particularly KLP, which is the dominant provider for municipalities without their own pension fund.

Following a complaint in 2022 from Storebrand, the European Free Trade Association’s (EFTA) compliance authority ESA told Norway earlier this year it believed there may have been widespread breaches of European Economic Area (EEA) public procurement law by municipalities failing to put their pension provision out to tender.

However, Norway refuted ESA’s claims in June.

Social sustainability 

In March 2024, the Norwegian parliament agreed on a package of changes to the pension system, aimed at strengthening social sustainability while ensuring economic sustainability.

Under the proposed legislation – which has yet to be finalised through further governmental and parliamentary processes – age limits for the state old-age pension (alderspensjon i folketrygden) are gradually to be increased for people born after 1964. 

Other measures include increasing civil servants’ working age limit from 70 to 72, as well as the establishment of a hardship scheme within the national insurance system for those who stop working before the standard retirement age.