The new Occupational Pension Act entered into force 1 January this year. The Act allows private employers to establish a third kind of pension scheme, being a hybrid between defined benefit and defined contribution schemes. As such, the new product is already being referred to as the new “hybrid-scheme”.
Furthermore, there have been changes in the regulations following the Occupational Pension Act. It is now possible for employers to pay a substantial higher amount to the pension plan in defined contribution schemes than earlier permitted. As earlier, employers’ pension payments will be tax deductible for the employer and will not be subject for taxation for the employee until payment date. The changes imply, in principle, that employers may provide substantially higher pension contributions to pension schemes than earlier. Due to the high cost and wage level in Norway it remains to be seen in the longer term whether or not the changes will have any significant effect, though.
New collective occupational pension product
The pension product presented in the new Occupational Pension Act, is an alternative to the two other (main) types of tax favorable occupational pension schemes. Therefore, it is often referred to as a “hybrid- solution”.
The contribution element involves the employer paying an annual pension contribution of the employee’s salary to the pension plan. The contribution will be based on the first amount the employee has earned. The employer is now able to pay an annual amount equivalent to a maximum of 7 % of the employee’s salary, limited up to 12 times of The National Insurance’s base amount (The National Insurance’s base amount – “G” – is per 1 May 2013 NOK 85 245,-). In addition, the employer may pay a supplementary contribution of up to 18.1 % of the employee’s salary between 7.1 G and 12 G. Hence, the new payment values allows the employer to pay a maximum of 7 % of the employee’s salary up to 7 G, and a total of 25.1 % of the employee’s salary between 7.1 and 12 G. These payments are deductable for the employer, and are not subject to taxation for the employee prior to the disbursement date.
The performance element in the new product involves that the employee, on the time of disbursal, is guaranteed an annual pension payment of a certain level. However, the actual amount is not definite until the disbursement date (the retirement date). The annual amount is based on the employee’s pension holdings (the pension contributions, as well as the returns of these contributions), including the employee’s life expectancy with life-long pension payments. If the pension is time-limited, the annual amount depends on the total years of payment.
The pension payment is usually life-long, but the new Act allows a limited pension payment until the age of 80 and for a minimum of 10 years total.
The employer holds the risk for returns on the pension contributions
The employer holds the risk for returns on payments to the pension scheme until the time of retirement and disbursal. However, the employer may choose to guarantee that the pension holdings are adjusted in accordance, either to the general salary increase in Norway, or the company’s salary increase. In other cases, the pension provider will guarantee that the holdings do not decrease in value, and will adjust the pension holdings in accordance with the actual returns.
Higher annual contribution for women
The annual contribution shall be slightly higher for women than for men. This is because women have a higher life expectancy than men, thus involving a larger pension holding for female employees. This supplement is an addition to the maximum pension contributions as mentioned above.
Employees may start pension withdrawals from the age of 62. It is not mandatory to withdraw pension from the National Insurance Fund at the same age. Furthermore, employees may, even after the age of 62, choose to continue in part- or full-time work, thereby permitting employers to choose to withdraw their pension from the age of 62, whilst continuing working.
The maximum contribution rates in collective contribution pension schemes is increased
Until 31 December 2013, companies with contribution schemes were permitted to pay contributions limited up to 5 % of the employee’s salary from 1 to 6 G, and up to 8 % of salary between 6 and 12 G.
Simultaneously as the new occupational pension product in the private sector was introduced with the new Occupational Pension Act, the regulations following the Act were changed. The changes allow employers to make contributions to the pension scheme, already on the first disbursed amount. Moreover, the point for when the employer may start to pay a higher, additional contribution – the so-called inflection point – is changed from 6 to 7.1 G. This is done to adapt to the new retirement pension in the Norwegian National Insurance Scheme. Companies who have contribution pension schemes have a deadline until 31 December 2016 to adjust their schemes to the new inflection point.
The maximum allowed contribution rates are also increased in accordance with the new rates in the new Occupational Pension Act. This is to accommodate to the retirement pension scheme following the National Insurance Fund, thus permitting new employees with contribution pension schemes to obtain approximately the same level on their retirement pension disbursements, as employees in companies who choose the new pension product in the Occupational Pension Act. The changes allow the employer to pay a contribution of up to 7 % of the employee’s total salary from the first earned amount and up to 12 G, or up to 7 % of the employee’s total salary between 1 G and 12 G, as was the entry level for pension payments prior to the new Act. Employers may also make an additional contribution for salary between 7.1 and 12 G. This additional contribution cannot be set higher than 18.1 %, thus permitting an optional pension contribution of up to 25.1 % of the employee’s salary between 7 and 12 G. As a result, the employer is able to offer a tax favorable occupational pension scheme as an alternative to a performance-based pension scheme.
Notwithstanding the above, the minimum statutory pension contribution (OTP), is still 2 % of the employee’s salary between 1 and 12 G.