Long term challenges for occupational pensions in the public sector

Over the last 10-15 years Norway has reformed its pension systems. Old age pension has shifted from defined benefit to notional defined contribution (NDC), where pension entitlements (wealth) upon retirement is transformed into an annuity by dividing with expected number of years as pensioner. The effect of extended longevity on pension expenditure is restrained, while many future pensioners may choose between reduced annual benefits or delayed retirement beyond an age of 62 years.

Old age pension benefits in Norway have several sources, including public pensions (National Insurance Scheme, folketrygden), special early retirement benefits (avtalefestet pensjon, AFP) and occupational pension schemes. Public sector employees comprise approximately one third of the labor force, and have a long tradition of a generous occupational pension scheme, with a minimum benefit of 66 per cent of final wage level after 30 years of service. Public occupational schemes were renegotiated in 2009, adapting only parts of the general pension reform. Extended longevity will reduce benefits, and public employees may compensate this reduction by postponing retirement beyond age 67. Public employees' early retirement schemes are exempted from the reform. The effect of postponed retirement upon annual benefits is diminished for public employees since extra years of employment will not increase pension entitlements. This arrangement may work for older cohorts of public employees, where longevity increases are yet small and few work beyond age 67. Younger cohorts of public employees, born 1970 and later, may have to choose between early retirement and low old age benefits, or working well into their seventies.

A brief summary of actual and proposed pension schemes is presented, including occupational pension schemes. Long term consequences of actual and proposed reforms are analyzed using simple type examples, as a first step to understanding forthcoming challenges. While these challenges may be several years away, it is not possible to change a pension system immediately in a legal and sensible way, and this Report discusses why a long term horizon is important.