Changes in workplace pensions

October 2022

Important changes have taken place in defined contribution (DC) occupational pension schemes in Norway recently. New legislation introducing "Own Pension Accounts" was implemented in 2021, and this year membership of DC schemes have been extended to include all employees. This article gives an overview of the Norwegian pension system and recent and expected changes in the various schemes.

The Norwegian pension system is built on three pillars.  The first pillar is the National insurance pension scheme. 

A pension reform was implemented in 2011 to make the National insurance pension scheme financially sustainable as longevity increases and the population ages. 

Each year an employee works, from 13 to 75 years of age, 18.1 per cent of salaries is contributed to a fictional, individual account in the National Insurance pension scheme. Pensions can be withdrawn from 62 years of age, and yearly benefits are calculated by dividing the accumulated pension pool on life expectancy remaining from the year of withdrawal. An employee can receive pension benefits and work at the same time. Pension benefits will increase significantly by working longer and postponing withdrawal, giving strong incentives to work longer. 

During accumulation, pension pools are indexed by general growth in salaries in Norway. During withdrawal, pension benefits are indexed by an average of general growth in salaries and inflation.

Over the last 20 years, defined contribution schemes (DC) have replaced defined benefit schemes (DB), and nearly all private sector employees are now members of DC schemes. Hybrid schemes were introduced in 2014 but covers few employees except for kindergartens and cultural institutions.

Occupational pension schemes were made mandatory by law in 2006, and employers must contribute a minimum of two per cent of salaries. The average contribution rate is approximately 4 per cent, with maximum levels of 7 per cent for income under 7 G1 and 25.1 per cent of income between 7.1 and 12 G. The higher maximum contribution rate for income levels above 7.1 G makes it possible for employers to compensate as income above this level does not generate contributions in the National insurance pension scheme. 

Occupational pension schemes make up the second pillar. Private sector pensions are regulated by law, and very few schemes are based on collective agreements exists. 

One exception to this rule is the Contractual Pension (AFP) in the private sector, which is based on a tripartite agreement between the labour market and the state. The state covers one third of costs in this scheme, which covers about half of the employees in the private sector. The scheme is only partially funded, and only employees who work for employers participating in the scheme when the employee turns 62 years of age and has worked for the employer for at least 7 of 9 previous years, qualify for benefits. The scheme is modeled on the National Insurance pension scheme and can be characterized as "pillar one and a half". 

The labor market parties are trying to reform the scheme, to make pension benefits more predictable for employees and costs more predictable for employers. However, the process seems to be stuck in an argument over whether costs for increasing the number of employees qualifying for benefits should be covered by increased premiums or lower benefits. 

Occupational pensions in the public sector are hybrid schemes, with DC characteristics during employment and DB characteristics and lifelong benefits during retirement. Occupational pension for municipals and hospitals are funded with life insurance companies or pension funds, while state employees are members of a pay as you go-scheme.

The new legislation introducing Individual pension accounts in the Norwegian defined contribution market was implemented during 2021. The goal was to consolidate pension earnings from previous employers in a single pension account, to reduce administrative costs and make it easier for employees to keep track of their pension savings. Pension capital certificates issued by previous employers are transferred into pension accounts in the current employer's active scheme. Employees could choose to opt out, but only 6 500 of approximately 1.5 million individuals did so when the scheme was introduced.² 

The Own pension account reform also made it possible for employees to transfer pension savings from the employer's provider to a provider of their own choice, opening a market for individuals to choose who should manage their workplace pension funds. Four per cent of employees have transferred their savings to a provider of own choice so far. A key aim of the reform is to reduce the costs associated with the administration of pension contributions from previous employers.³  Individuals pay the same fee for former earnings from pension capital certificates transferred to the Individual Pension Account as the employer pays for current earnings, benefitting from the employer's ability to achieve lower prices in the market. 

From 2022, all income gives right to pension contributions under the Mandatory occupational pension rules, not just income above 1 G¹. Membership in occupational pension schemes has also been extended to include employees working less than 20 per cent of full time and who are under the age of 20 years. 

Individual Pension Savings

Individual pension savings make up the third pillar. Norway has tax incentives for individual pension savings, but the limit on annual savings has been reduces from NOK 40,000 to NOK 15,000 in 2022⁴. 

A commission appointed by the Ministry of Labor and Social Affairs has evaluated the pension reform and presented proposals for change. A report was delivered to the Government in June 2022. 

The commission, with both experts and participants appointed by the political parties, concludes that the changes made in 2011 works as expected and has contributed to more people postponing retirement because of strong economic incentives to work longer. 

Among the proposals is automatic age adjustments for earliest withdrawal of pensions as longevity expectations increases. The report states that age limits in occupational and individual pension schemes should be adjusted accordingly. 

We expect this to be implemented during the next years. We also expect a discussion on minimum mandatory contribution rates for private sector occupational pensions, as a result of LO, the largest trade union, has demanded an increase from 2 to 4 per cent of salaries.