Norway Economic Survey shines light on future of pensions
22 August 2008

Written by Sophie Baker

The medium-term outlook for public finances in Norway are in relatively good shape, partly due to increasing pension fund revenues, according to the Organisation for Economic Co-operation and Development’s (OECD) Economic Survey of Norway, 2008.

Another reason for the ‘good shape’ of the next ten to 20 years of Norway’s public finances is because the effects of the ageing of the population are coming somewhat later in Norway than in most countries, says the OECD.

From 2010, Norway is due to implement the pension reform, converting the state pension system into a notional defined contribution, and still unfunded, scheme. Therefore, the expected value of retirees’ pensions will be equivalent to the notional accumulated value of their lifetime pension contributions.

At present, social partners have agreed a supplementary pension scheme, Avtalefestet Pensjon (AFP), which is subsidised by the government. It significantly reduces the incentives to work after the age of 62 for a large majority of the workforce. However, from 2010 the AFP will be reformed to offer an income supplement for people over the age of 62, thereby restoring work incentives.

While the OECD acknowledges that the pension reforms will restore better incentives for older workers to remain in the labour market, the organisation is concerned that slow progress in sickness and disability reform suggests that it is difficult for the government to increase domestic labour supply, despite its potential.

However, the survey also notes that current government projections show a long-term financing gap that the expected returns from the Pension Fund are insufficient to close, causing the need for long-term fiscal consolidation and structural reforms to increase working hours and reduce future pension spending.

The Government Pension Fund, Global (hereafter the Pension Fund), is an offshore fund, to which surplus wealth produced by Norwegian petroleum is transferred. This policy, however, means that the public and private consumption in Norway together account for only about 60 per cent of GDP, whereas other G7 countries have between 80 and 85 per cent.

The Pension Fund is designed to support long-term management of petroleum revenues, and proceeds from the fund are used to finance the non-oil budget deficit, and are not assigned for pension expenditures. Since 2001, this has been supplemented by the fiscal guideline stating that only the expect long run real returns can be channelled into the budget. These long run returns are estimated using a four per cent real rate of return, and over time the non-oil structural deficit should correspond to these returns.

The survey says that, taken together, the Pension Fund and the four per cent guideline “have had a major, highly favourable impact on both the economy and public finances”.