Ulf Vidar Knudsen
The reasons for the latest social security reforms are statistical observations and predictions regarding the increased longevity of the Norwegian population, which show that there will be fewer active workers for each pensioner in future. Also, future pensioners will receive much higher pension benefits than pensioners today.
The new social security system will result in a closer connection between income and pension benefits. This means saying goodbye to the principle of an average of the 20 best years over the required 40 service years. The new system also allows for a flexible retirement age, where an individual can choose to retire between the ages of 62 and 75. Early retirement will mean decreased retirement pension benefits, however.
From the politicians’ point of view, these changes ensure that the government can finance its obligations even if increased longevity continues.
The new system will also stimulate people to work longer, because:
- pensions can be earned by working entirely or partially up to age 75
- pensions paid by social security will not be reduced by employment income.
What are the main features of the new social security system?
Guaranteed pension benefit
Everyone with a minimum of three income years in the social security system is assured of a minimum pension, defined as a fixed amount regardless of previous income. For the full amount, you need 40 years of service or more. Fewer years of service will reduce the basic pension.
People with pensionable income between the ages of 13 and 75 have a right to an income pension. Each year of work will accrue a pension right, and the more years of pensionable income, the higher the pension. The accrued credit will be converted to an annual pension benefit by using a conversion table on retirement. The total pension will be the sum of the guaranteed pension and the income pension.
Flexible retirement age
The retirement pension can start either completely or partially at age 62. The latest age to take a retirement pension is at 75. If the pensioner earns income from active work while receiving a retirement pension from social security, there will be no reduction in benefit.
The conversion figure will take into account current longevity predictions, calculated from the date of pension benefit withdrawal.
Transition solutions for the new rules
Transition solutions are in place according to when pensioners were born.
All pension accruals will be indexed in line with the general increase in salaries and the consumer price index.
Does the new system have any special advantages or disadvantages which need to be considered?
Ulf Vidar Knudsen
- a stronger relationship between employment income and pension benefits
- more flexible withdrawal of the retirement benefit due to the flexible retirement age
- the cash value of the pension benefit withdrawal will be maintained on early/late withdrawal
- the pensioner can earn income in addition to the pension benefit from social security, without any reduction in benefits
- pension rights will be accrued from age 13 to age 75. All earned income will result in increased pension benefits
- unpaid work such as raising children, or taking care of sick relatives, will provide pension income - based on specific rules.
- overall the rules and regulations look simple. However, for individuals it might appear complicated due to the flexibility offered. This could lead to a need for more advice and consultancy.
What issues are your corporate clients facing? What advice are you giving them, and are you offering any support? Are you expecting any structural changes regarding employee benefits?
The changes are intended to give more freedom to the individual, but at the same time, they also mean more responsibility. Everyone will earn pension rights, but these will not by themselves guarantee a good retirement. The challenge will be to see these changes in connection with the company pension plans offered by employers, and find ways to integrate them. This will result in amended rules for company pension plans, and adaptation to the new rules when designing new plans. We will face an intense period of work when the new rules are formally agreed by the government.
What is the response of the insurance industry – and in particular Vital – to the new system? Will it have an impact on your market strategy, products and distribution?
Ulf Vidar Knudsen
It is still a little early to talk about this in detail, however, this major change will certainly mean a re-analysis of current products, with new designs and product developments to stay in line with market requirements. Our conclusions are not yet definite, as the reform has not yet been finalized by the government.