This year, the Norwegian pensions market has been preoccupied with the adoption of mandatory occupational pension (OTP) legislation.

The legislation, which came into effect on 1 January 2006, requires all Norwegian companies that did not previously have occupational pension schemes to establish one before 1 July 2006.

Jimmy Johansen, principal of Mercer’s retirement business in Oslo, believes that large groups of employers have only established pension schemes for their employees recently.

“Some 600,000 new workers have entered the insurance market. A lot of small firms, particularly in the services sector, did not have any insurance schemes for their employees before July,” he says.

“The launch of the OTP legislation has also created a lot of competition within the industry. All insurance companies want to get a piece of the cake. Some 4-5 new players have entered the market as well,” Mr Johansen adds.

The new system requires employers to establish a group pension plan for their employees and contribute 2 per cent of the employee’s salary into the plan. It was created as a response to the future demographic estimates, which suggest that the country’s oil wealth will not be sufficient to finance future pensions. An OECD report published earlier this year confirms that Norway will face a fast maturing public old age pension system over the next 30 years, whereas its oil revenues will cover only a part of the liabilities. The OECD estimates that the proportion of those aged 65 or older in Norway will increase from around 15 per cent of the population to 24 per cent by 2040. It also expects the old-age dependency ratio to almost double, reaching 40 per cent by 2040.

Recently, the Norwegian pensions market has also been considering a proposal by Kredittilsynet, the country’s financial supervisory authority, to adopt the prudent person principle in pension fund investments.

At present, the regulator’s proposal is subject to consultations with related industry organisations, which will end on 30 October. The local pensions industry expects the ministry to report on the findings of the hearings before the end of the year.

Caspar Holter, partner at Oslo based Pensjon & Finans consulting, told nrpn’s sister publication epn that the ministry and Kredittilsynet have somewhat differing views on pension investment regulations.

“Kredittilsynet has proposed introducing the so-called prudent person principle in Norwegian pension investment regulations. This means that the upper limit of 35 per cent for all assets in equity investments would be abolished,” Mr Holter explains.

The intention is also to increase the limit of hedge fund investments to 10 per cent of all assets, but with a maximum of 1 per cent that could be invested in each hedge fund. All other limits, except for hedge funds, would be abolished.

“However, the outcome of the proposal is still somewhat uncertain. The ministry is not sure if the prudent person principle is the right way ahead. They want quantitative regulation and to make sure that, in the end, the clients of pension companies will get what they have paid for,” says Mr Holter.

In late 2005, Kredittilsynet also proposed introducing a Swedish-style traffic light system to supervise pension investments in Norway.

“The rationale behind the proposal to introduce the prudent person principle is that it would work together with a future traffic light system. On the one hand, pension institutions would have a more liberal environment to work in, but on the other, they would be efficiently monitored by the supervisory authority,” says Mr Holter.

Mr Johansen points out that the local pensions industry has welcomed the proposal. “Even though the proposal will liberalise equity investments, a major rush to invest in the asset class is unlikely. Smaller funds in Norway rarely have more than a third of their assets invested in equities and this is more likely to increase gradually than suddenly,” he says.

A summary of Norway’s changes

• Norway will face a significant ageing of its population over coming decades. The OECD estimates that by 2040, the proportion of those aged 65 or above will increase from around 15 per cent of the population to 24 per cent.
• The old age dependency ratio (those 65 and older relative to those 15-64) is expected to almost double, to 40 per cent by 2040, as compared with more than 50 per cent for the OECD.
• In addition to purely demographic factors, pension expenditure is expected to grow as a result of the continued maturing of the earnings-related, pay-as-you-go second tier.
• According to the latest national estimates, the gap between spending and revenues, absent reforms, would rise by about 10 per cent of GDP by 2050 without any reform.
• The OECD says that even if the entire revenue of the petroleum fund were devoted to satisfying future pension needs, the Norwegian pensions system is a long way from sustainability. Reforms are both necessary and urgent.

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