Pensjonskasse Foreningen chief executive officer, Christer Drevsjö, discusses the Norwegian Ministry of Finance’s initiative to enhance private occupational pensions, with a focus on paid-up policies

There is currently a significant effort in Norway, led by the Ministry of Finance, on how the provision of private occupational pensions can be improved for defined benefit schemes. For former employees, so-called ‘paid-up policies’ are issued, and their subsequent value varies greatly. Some find themselves with a valuable asset, while others may see their values deteriorate.

Paid-up policies in Norway are managed by life insurance companies and pension funds. Life insurance companies are commercial and owned by shareholders (for instance, Storebrand and DNB). Pension funds, on the other hand, are non-commercial and self-owned (e.g. the pension fund for employees of the oil company Equinor).

Approximately three-quarters of the value in paid-up policies is held by insurance companies, while the remaining quarter is in private pension funds. It is possible to transfer a paid-up policy from a pension fund to an insurance company, but not vice versa. In Norway, life insurance companies and pension funds are subject to the same regulations, though there is an ongoing discussion about whether uniform rules should continue in the future.

Pension funds are fundamentally different from life insurance companies. Insurance companies will always try to protect the shareholders’ values. This issue does not exist for self-owned pension funds, which exclusively aim to safeguard the interests of the policyholders.

Due to their structure and the need for owner protection, Norwegian life insurance companies have an exposure to equities in fully paid-up guaranteed products of between four and 10 per cent. This is modest and provides limited prospects for returns beyond the guaranteed interest. This result is due to life insurance companies’ need to avoid risk and exposure of their assets.

Private pension funds, on average, have 42 to 43 per cent of their capital invested in equities, including for the fully paid-up policies. This yields a completely different return compared to life insurance companies.

The reason for this is partly that pension funds have much larger buffers than life insurance companies. In individual years, pension funds have an average return of up to 15 per cent.

Additionally, as pension funds manage funds collectively, the high equity exposure applies to both new accruals and closed contracts. This means that pension funds are able to achieve significantly better returns over time and also much better returns overall. This, in turn, allows for better regulation of pension benefits under disbursement from paid-up policies in pension funds. In other words, the issues that need to be addressed primarily concern life insurance companies and not pension funds. At the same time, it is essential that pension funds retain the ability to have large buffers to manage volatility.

Both life insurance companies and pension funds are now participating in the Ministry of Finance’s advisory council. The employee representative (LO) and representatives of the policyholders (the Pensioners’ Association) are both explicit that paid-up policies are mainly a challenge in life insurance companies, not in pension funds. The Financial Supervisory Authority can also confirm that pension funds have a completely different management approach than life insurance companies. At the same time, there is a great need to ensure that any new regulatory changes do not disrupt the well-functioning operations of pension funds.

Life insurance companies deliver no more than the guaranteed return, while pension funds often regulate rights better than this and help maintain purchasing power for retirees.

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