Reform of occupational pensions in the Norwegian public sector

The aim of the report is to illustrate effects of a reform of occupational pensions in the Public Sector agreed upon by the social partners on March 3, 2018. With the new system all employees in the Public Sector born 1963 or later will earn entitlements for occupational pensions as a supplement to old-age pensions in the National Insurance System (NIS) following the main principles from the reform of NIS in 2011. For these cohorts, accumulation of entitlements with the new system is planned to start January 1, 2020. The existing early retirement scheme (AFP) will be replaced by a life-long supplement following the same principles as the early retirement scheme in Private Sector.

Effects of the agreement from 2018 are compared with two alternative systems. First, the new system is compared with a continuation of the existing system including preliminary adaptions of occupational pensions in the Public Sector to the reformed NIS agreed upon in 2009. Secondly, effects from the reform are compared with the counterfactual case of no reform of the pension system in 2011.

No final agreement on how to adapt occupational pensions in the Public Sector to the new system for NIS was reached during the negotiations in 2009. Tightening elements, like life-expectancy adjustment and lower indexation than wage growth for pension benefits under payment, were however introduced, while the systems for gross pensions and early retirement were maintained. Possibilities for employees in the Public Sector to counteract life-expectancy adjustment by postponing retirement were also weaker than in the Private Sector, and adoption of the system beyond the 1958-cohort was unsettled. For later cohorts a continuation of the preliminary agreement from 2009 would obviously cause a rigid system and stronger tightening of occupational pensions than benefits from NIS.

By the adaption of the new system for occupational pensions to NIS for those born 1963 or later in 2020, persons from these cohorts get a flexible system and may counteract life-expectancy adjustments by postponing retirement. On the other hand, benefits in the case of early retirement will be low. For cohorts up to 1958 the tightening of net occupational pensions is in line with the tightening of NIS. For the cohorts born 1959 to 1962 tightening will be stronger because of life expectancy adjustment and because a guarantee for the benefit level to be at least 66 per cent of earnings at retirement of age 67 is gradually phased out. This will cause a significant discontinuity in the pension level and system between the 1962- and 1963-cohorts. In addition to phasing out of the guarantee and possibilities to counteract life-expectancy adjustments by postponing retirement for cohorts born 1963, these and later cohorts will also benefit from having their entitlements indexed by average wage growth. Cohorts born before 1963 will probably lose from the link of pension entitlements to final earnings with the existing system because individual wage growth towards the end of the career normally is lower than average.

The effects of the reform are analysed by using Statistics Norway’s dynamic microsimulation model MOSART. Detailed pension rules as well as detailed information about labour market incomes and employment in Private and Public Sector for everyone in the country are included in the model. Limitations in the data used regarding accumulation of entitlements in the Public-Sector cause weaknesses in the quality of the calculations and make the results more uncertain than in the analyses for NIS. However, work is going on in Statistics Norway to collect new and more comprehensive data that will improve the quality of the analyses. Uncertainty is greatest in the calculation of net occupational benefits with the existing system because these amounts are calculated as differences between gross benefits from the occupational pensions and benefits from NIS.