Entered into the archives of the Research Council of Norway on 31 March 2010.

Transcription

1 The Royal Norwegian Ministry of Labour Entered into the archives of the Research Council of Norway on 31 March The Research Council of Norway P.O. Box 2700 St. Hanshaugen NO-0131 OSLO Norway Your ref. Our ref. Date: /TIL 23 March 2010 Supplementary letter of allocation to the Research Council of Norway Evaluation of the pension reform Please refer to the letter of allocation for 2010 dated 8 February 2010 from the Ministry of Labour to the Research Council of Norway. The letter includes funding for an evaluation of the pension reform. The following describes in greater detail the ministry s desires and intentions for the planned evaluation. The Ministry of Labour refers to the efforts already underway between the ministry and the Research Council in connection with the evaluation of the pension reform, and hereby requests that the Research Council establishes the framework for the processes involved in conducting such an evaluation. Attached is a memorandum on the scientific platform for the evaluation. One objective of the evaluation, in addition to assessing whether the reform is functioning according to its purpose, is to promote the development of research-based expertise on thematic areas related to the pension system and the pension reform. In the view of the ministry, it would be appropriate to begin the evaluation in This means that the administrative basis for the evaluation should be in place in time to issue funding announcements in the summer of The ministry has chosen to organise the evaluation under the Research Council to ensure its scientific quality and the independent status of its implementation in the best possible manner. The ministry anticipates that organising the evaluation under the Research Council will result in effective coordination in relation to other, closely related research programmes, such as the Evaluation of the National Labour and Welfare Administration Reform (EVANAV), the Programme on Sickness Absence Research (SYKEFRAVÆR) and the Research Programme on Welfare, Working Life and Migration (VAM). The Research Council is asked to appoint a steering group, in consultation with the Ministry of Labour, that will be responsible for preparing the funding announcements based on the ministry s objectives and framework document. We expect the Research Council will submit a draft of the funding announcements to the Ministry of Labour prior to their issuance. It may be appropriate for the steering group to include researchers from outside Norway as well, such as from other Nordic countries. This will ensure impartiality and provide inspiration from individuals who have worked with similar issues in other countries.

2 Given that the evaluation will also encompass the process up to the final proposal and thus the ministry s role in the pension reform, and to ensure that it maintains an independent status, we do not find it advisable for the ministry to participate in the steering group. However, a close dialogue between the Ministry of Labour, the Research Council and the research institutions throughout the evaluation will be crucial. To address the need for dialogue, we ask that a user group be established to ensure reciprocal exchange of information. It may be beneficial for the National Labour and Welfare Administration (NAV) and Statistics Norway (SSB) to participate in this user group to, among other things, modify the data needed for use in the evaluation. The user group may, for example, discuss issues regarding the focus and progress of the evaluation as well as any adjustments required. The parts of the evaluation that deal with the implementation of the pension reform, surveys of the general population s knowledge about the pension reform, and international experiences should be given priority at the start of the evaluation. This also applies to the changes resulting from the introduction of the flexible early retirement scheme from age 62 and the opportunity to work while drawing a pension without the pension being reduced. However, the evaluation of the latter point depends on the availability of data regarding retirement patterns before and after the regulatory changes come into force on 1 January In addition, changes to the projects and research questions may need to be made during the course of the evaluation, since some aspects of the reform may be adjusted and new insights may give rise to new research questions. The dates for the funding announcements and the start-up of the various projects must be established after careful review by the steering group. A key aspect of the evaluation should be to contribute to the ongoing dissemination of the findings. It is recommended that this be done by e.g. organising open user seminars on a regular basis while the evaluation is being conducted. The ministry and other relevant players, such as the social partners, the Norwegian Pensioners Association and the Norwegian Federation of Organisations of Disabled People, should have the opportunity to participate in these seminars. The evaluation of the pension reform will be comprehensive, and the various thematic areas will require a wide range of qualifications. It may therefore be appropriate to divide the commission between several different groups rather than expecting a single group to submit a tender for the entire evaluation task. On the other hand, it will be necessary to have a project manager who views the various projects in conjunction with each other, coordinates the groups involved and amalgamates the various findings into a single report. Consideration should be given to advertising separately for a position as project manager for the evaluation of the pension reform. We expect that the Research Council will adhere to the plan outlined in this memorandum and the timeframe provided to the ministry in its further evaluation efforts.

3 Yours sincerely, Tone Westlie (p.p.) Deputy Director General Tone Iren Limbodal Senior Adviser Attachments

4 Objectives and framework document for the evaluation of the pension reform 1. Background and purpose of the evaluation The pension system will face major challenges in the coming years. This is due especially to the dramatic ageing of population that is foreseen. The efforts to reform the pension system have been underway since 2001 when the Norwegian Government appointed the Pension Commission. The subsequent efforts in connection with the pension reform resulted in two political agreements in the Storting, demonstrating that a broad-based majority in the Storting supports the continuation of a common public pension system as the basis for the overall pension system. The Storting voted to introduce the new old-age pension under the National Insurance Scheme, which serves as the foundation of the pension system, in the Act of 5 June 2009 No. 20 relating to amendments to the National Insurance Scheme (the new old-age pension scheme). Key aspects of the new old-age pension under the National Insurance Scheme are: Flexible early retirement scheme from age 62 to 75, introduced as from Life expectancy-based adjustment of pensions, introduced as from New indexation for paid-out pensions, introduced as from 2011 for all oldage pensioners. New pension earning model, which takes into account the total years of work, introduced gradually. The current pension earning model will continue to apply to people born up to and including The new pension earning model will apply in full to people born in 1963 or later, while the new model will apply on an increasing scale to people born in The pension reform encompasses the entire pension system. Consequently, other parts of the pension system that apply in conjunction with old-age pensions under the National Insurance must also be adapted. The parties in the private sector entered into an agreement on a new contractual early retirement pension (AFP) in the wage settlement of An agreement was reached in the publicsector wage settlement of 2009 to maintain the current rules for civil servant pension schemes ( gross arrangements, which guarantee a certain level of pension regardless of the benefits paid out by the National Insurance) and AFPs in the public sector while making the adaptations needed for the introduction of the flexible early retirement scheme under the National Insurance beginning in 2011 and the adaptations necessitated by the Storting s decision in May Furthermore, the statutory framework for the private occupational pension schemes must be adapted to e.g. the flexible drawing of old age pensions from the National Insurance Scheme. The Ministry of Finance has charged the Banking Law Commission with the task of assessing these adjustments which are planned to take effect on 1 January 2011, the same date as the launching of the flexible early retirement scheme under the National Insurance. As a result of the new old-age pension scheme under the National Insurance, adaptations must be made to the rules for other benefit schemes. The Ministry of

5 Labour plans to present draft legislation on a new scheme for disability benefits and old-age pensions for persons who have received disability benefits in Key objectives of the pension reform are to: Create an economically and socially sustainable pension system; Establish a framework for a flexible, individually adapted transition from work to retirement; Motivate people to continue working; Ensure satisfactory income distribution and gender equality; Create a system based on easily understood main principles and adequate information. The issue of the evaluation of the pension reform is addressed in the letter dated 2 April 2008 from the Office of the Prime Minister to the National Mediator s Office regarding an adapted AFP scheme for the private sector, cf. Proposition No. 6 ( ) to the Odelsting, On amendments to the National Insurance Scheme (the new old-age pension scheme): The Government will ensure that the pension reform is evaluated on an ongoing basis in order to assess whether the reform is functioning according to its purpose. In addition to assessing whether the reform is functioning according to its purpose, the evaluation is to promote the development of research-based expertise on thematic areas related to the pension system and the pension reform. Although the evaluation of the pension reform will be of limited duration, the fact that the population is ageing will create an ongoing, growing need for knowledge in these areas as the basis for designating policy. In the view of the ministry, it would be appropriate for the evaluation to begin in The evaluation is to be research-based and administered by the Research Council of Norway. A steering group will be appointed and a user group with representatives from the Ministry of Labour, the Research Council, the Norwegian Labour and Welfare Administration (NAV), Statistics Norway (SSB) and the research institutions will be established to ensure reciprocal exchange of information and facilitate discussions regarding any need for adjustments during the evaluation process. 2. Relevant issues The purpose of the evaluation is to investigate whether the pension reform is achieving its key objectives for the pension system: economic and political sustainability over time, increased flexibility, satisfactory income distribution and gender equality, and easily understood main principles. The section below presents some of the most crucial issues in connection with the evaluation. It will also be possible to propose projects that address other relevant thematic areas. 2.1 Economic and social sustainability The pension reform must be assessed on the basis of whether it is economically sustainable and results in a level of expenditures which future generations are prepared to finance over an extended period of time. The reform must also be

6 assessed to determine whether the levels of pensions are reasonable and will uphold income distribution policy satisfactorily. The new old-age pension scheme has been given a neutral design to ensure that the expenditures over time from old-age pensions under the National Insurance Scheme will be not be overly dependent on when the individual chooses to begin drawing a pension. Furthermore, the life expectancy-based adjustment of pensions will ensure that future expenditures will not rely too heavily on changes in life expectancy in that an increasing life expectancy will result in a lower annual pension for a given pensioner. The evaluation should assess whether these considerations are adequately safeguarded in the proposed regulations. In Sweden, the pension system is autonomous, meaning that the benefits in the system are dependent on payments into the system. If these payments do not adequately cover the benefits, the size of the pensions will be reduced. In Norway, pensions will continue to be financed over the national budget, and there are no plans to establish an autonomous system. Calculations by Statistics Norway show, however, that based on the given assumptions the expenditures from the national old-age pension scheme will almost stabilise in the long term as a proportion of pensionable income. The evaluation should assess whether the system is resilient under various conditions related to trends in birth statistics, immigration, etc. When assessing economic resilience, the evaluation should determine what alternatives are relevant for comparison. 2.2 Flexible early retirement scheme Under the pension reform, individuals aged may choose to draw a flexible early retirement pension beginning in They may also draw a graded oldage pension and combine this with income from work without this triggering a reduction in the pension. The scheme has a neutral design so that the current value of the pension expected will not depend on when an individual begins drawing it. Those who wait to draw an old-age pension will therefore receive a higher annual pension during their entire period as a pensioner. One purpose of the neutral design of the flexible early retirement scheme is to encourage people to remain longer in the workforce than under the current system and to increase the opportunity for a flexible transition from work to retirement. The evaluation is to examine the trends in workforce participation and retirement behaviour among the elderly, whether many people choose to combine work with retirement, and the ways in which the pensioners income level in the future will depend on the point in time when they retire. Analyses should also be performed to determine the degree to which changes in behaviour may be influenced by the pension reform or other conditions and whether various groups exhibit different behaviour and have different opportunities to remain longer in the workforce, e.g. depending on salary level, educational level, gender, type of work and the state of the economy. In this connection, the evaluation should also consider the

7 role of disability pensions and other schemes under the National Insurance as well as the impact of supplementary schemes. Analyses should also be performed on how the life expectancy-based adjustment may influence how individuals adapt to occupational activity and retirement over time and how this effect can be distinguished from other consequences of the pension reform and other elements that affect the older people s occupational activity and retirement patterns. The evaluation should also address the relationship between new rules for flexible early retirement and employment contracts and the special retirement ages in the private and public sectors. As life expectancy increases, it will be beneficial to allow individuals to remain longer in the workforce, but it will still be important to establish rules that regulate the termination of employment contracts. 2.3 Income security, income distribution and gender equality A key objective of the pension system is to ensure that the elderly are guaranteed a decent income, and the evaluation should assess whether the level of income-based pensions provides reasonable income security. Another crucial objective of the national old-age pension scheme is to equalise the income among various groups of pensioners. This is achieved partly by establishing a floor to ensure that all pensioners receive a minimum level of income in their old age. The minimum pension has been increased during the pension reform efforts, and the evaluation should study the impact of a higher minimum pension on the design of the overall pension system. The establishment of a minimum income level is intended to help to counteract relative poverty among old-age pensioners. It is also an objective that the main rules of the pension system encompass a clear majority of the population, in part to ensure effective incentives to work and to limit retirement expenditures. The evaluation should assess whether the minimum income level is set at an acceptable level based on these considerations and that the indexation of this level will ensure reasonable growth over time. The evaluation should also examine the issue of individual-based benefits in relation to benefits linked to a person s civil status and number of children, including the relationship between the minimum income level for singles and married couples. The regulations for old-age pensioners who previously received disability pensions, including at what point in time a person should go from being a disability pensioner to an old-age pensioner, need to be clarified by The regulations for old-age pensions for previous disability pensioners must be assessed both from the perspective of income distribution and the economic ramifications. The opportunity to draw a flexible early retirement pension from age 62 means that the regulations for paid sick leave, unemployment benefits and other

8 temporary benefits must also be adjusted, and these adaptations should be assessed in the evaluation as well. For people who have worked in different countries, special rules on the coordination of benefits apply. In addition, an individual must have lived in Norway for 40 years in order to receive the full minimum pension under the National Insurance. However, pensioners with a shorter period of residence in Norway and who do not have other sources of income may receive a supplementary benefit to ensure that they receive a pension comparable to the minimum pension. The evaluation should assess whether the new pension system is functioning according to its purpose in relation to individuals who have earned pensions in other countries and those who have lived in Norway for a period under the minimum. The pension system also contains special rules for pension earning for unpaid care-giving duties, compulsory military service and any periods of unemployment, and the evaluation should also encompass these schemes. On average women have a lower pensionable income, work more frequently on a part-time basis and participate fewer years in the workforce than men. The National Insurance Scheme compensates somewhat for this, in part through the minimum pension, a ceiling on pension earning, pension earning for unpaid caregiving duties and inheritance rights. There is therefore greater uniformity in the distribution of paid-out old-age pensions than the distribution of pensionable income. The evaluation should examine the gender equality dimension of the new old-age pension scheme. 2.4 Easily understood main principles An objective of the pension reform is that it is to be based on easily understood main principles for the earning and payment phases. Individuals should be able to see the connection between their work-related income and pension and understand that the amount of their annual pension will depend on when they decide to retire. To achieve this, it is crucial that the regulations are not too complicated and that NAV provides good information to those who seek it. NAV is currently developing a pension portal which, among other things, will allow individuals to apply for a pension. The portal will publish information about earned rights, including the amount of pension a person can expect to receive depending on when he or she decides to retire, and on the opportunity to combine work with drawing a pension. A particular challenge in the transition phase from the current to the new system will be to provide parallel information about pension earning in two different systems and about how pensions are weighted for different age groups. There will be a need to provide different information to different groups, i.e. depending on whether a person is encompassed by the rules for the flexible early retirement scheme and the degree to which a person is covered by the new pension earning system.

9 The evaluation should provide an assessment of the information that is given about the pension reform and the degree to which individuals understand the information given about the pension earned and anticipated pension level. This should be ascertained by, among other things, administering a questionnaire to the population. The evaluation should also examine whether the pension portals now being developed provide satisfactory, relevant information about the total pension to which a person is entitled, including information about rights related to AFP schemes, occupational pension schemes and individual pension schemes. 2.5 Developments in the overall pension system Although the main focus of the evaluation will be the new system of old-age pensions under the National Insurance Scheme, an individual s pension will depend on the sum of a variety of schemes such as old-age pensions under the National Insurance Scheme, AFPs and occupational pensions. A person s decision to enter into retirement will depend on the overall pension he or she will receive. Likewise, the income situation and development of pensioners compared with other groups will depend on developments in overall income. Consequently, the evaluation should encompass more than the old-age pensions under the National Insurance Scheme. It should cover adaptations in the disability pension scheme and other parts of the regulatory framework governing the National Insurance. Additionally, it should include the reorganisation of AFP schemes and the occupational pension schemes in the public and private sectors. The reform will also have an impact on people s need and desire to save personal funds towards their own retirement, and on whether the pension system in total results in pension replacement rates that are too high in relation to what an individual would choose when taking into account the costs of financing the schemes. The evaluation should examine the incentives to remain in the workforce in the overall pension system, including the AFP and occupational pension schemes, as compared with the national old-age pension scheme alone. An assessment should also be made of whether the occupational pension schemes will adapt in light of the new AFP scheme in the private sector and to what degree the adaptations made in other schemes support the purpose of the reform of the national old-age pension scheme. The AFP scheme in the private sector has been reorganised as a supplementary pension scheme, whereas the current AFP scheme will continue in the public sector. The evaluation should investigate whether this may lead to differences in occupational activity among older employees which may be traced back to different designs of the AFP schemes. The evaluation should also address the economic consequences of various means of and responsibility for financing the different pension schemes, including the relationship between financing through pension funds and the ongoing financing of pension commitments. For the individual, it is the impact on the income after taxes that will determine whether or not it is worth continuing to participate in the workforce. The

10 analyses should therefore give consideration to the effects of the tax system and any changes in the tax system over time. Also, income-based user payments for public health and care services will have significance for pensioners living conditions and income framework, and it may be of interest to assess whether such factors will influence an individual s choice of when to start drawing a pension. 2.6 Implementation of the pension reform The pension reform has been a long process which began with the presentation of the Pension Commission s report in This was then followed up with a government white paper in 2004 which was deliberated in 2005, and another government white paper in 2006 which was deliberated in The amendments to the new old-age pension scheme were adopted in 2009 after being circulated for consultative review in The evaluation should assess the implementation process from the Pension Commission s report to the final proposal on reform of the system. This should include ways in which the organisation of activities through a commission comprised of representatives from the various parties, and the subsequent consultations and contact with the parties, may have affected the final result. It should also assess the degree to which the objectives of the reform and the design of the new regulations have changed over time, and how the objectives and the process compare with similar reform processes in other countries. The evaluation should investigate attitudes towards the pension reform among various players such as the labour movement, the media and the general population, and how these have influenced the substance of the reform. Have attitudes changed over time and have they been influenced by various factors such as the economic cycles, fluctuations in oil prices and the trends in public funding? 2.7 International experience In recent years a large number of countries have implemented pension reforms in light of an ageing population and a weaker outlook for state financing. International comparisons of pension systems have been conducted by, for example, the OECD in the publication Pensions at a Glance and other reports. The evaluation should assess the Norwegian pension reform in an international perspective. Relevant areas for study will be the pension replacement rate that Norwegian old-age pensioners can expect to receive in the future compared with old-age pensions in other countries, the organisation of the flexible early retirement scheme and the retirement pattern, and the growth in pension expenditures as a proportion of pensionable income and GDP. The pension replacement rates should be estimated both for the National Insurance alone and for overall levels that include other pension schemes which cover large segments of the population, and these rates should be calculated for before and after taxes.

11 3. Organisation of the evaluation and financial framework 3.1 Organisation of the evaluation The evaluation of the pension reform is to be organised under the Research Council of Norway to ensure its scientific quality and safeguard its independent status during implementation. This will also ensure effective coordination in relation to other research programmes, such as the Evaluation of the National Labour and Welfare Administration Reform (EVANAV), the Programme on Sickness Absence Research (SYKEFRAVÆR) and the Research Programme on Welfare, Working Life and Migration (VAM). Some projects within the evaluation, such as processes related to the implementation of the pension reform, surveys of the general population s knowledge about the pension reform, and international experiences, should be launched quickly. Changes resulting from the introduction of the flexible early retirement scheme from age 62 and the opportunity to work while drawing a pension without this triggering a reduction in the pension may emerge relatively quickly, as these elements will come into effect in However, analyses of the effects of the flexible early retirement scheme will depend on data regarding retirement patterns before and after the regulatory changes and for this reason it may be beneficial to conduct these analyses at a later time. In addition, changes to the projects and research questions may need to be made during the course of the evaluation, since aspects of the reform may be adjusted and new insights may give rise to new research questions. To address the need for dialogue between the Ministry of Labour, the Research Council and the research groups, a user group aimed at reciprocal exchange of information is to be established. 3.2 Financial framework The pension reform is a comprehensive, long-term reform, and as mentioned in section 2 above, the ministry is seeking a broad-based evaluation encompassing a number of thematic areas. The ministry plans to provide the evaluation of the pension reform with a financial framework of about NOK 7 million annually for a period of eight years. Assuming start-up in 2011, the overall financial framework for the evaluation will be roughly NOK 56 million for the period