Individual pension accounts have been introduced in Norway 1 January 2021 and entail changes for both employers and employees. In this blog post, we focus on what an individual pension account means for employers with a defined contribution pension. Can we just sit back and assume this will go well?
A great deal has already been written from various actors about what this means for the individual employee. If you would like a good overview of what an individual pension account implies in detail, you can read more in the blog What happens to your pension from 2021?.
An individual pension account definitely also applies to employers
The occupational pension providers message to employers so far has been that you as an employer can trust that you are in the best hands and that you do not have to think about the consequences of the new law. They fix it and make sure everything goes well - but is that the best strategy?
- Paragraph §2-7 of the Defined Contribution Pension Act imposes a comprehensive information requirement on the employer. Is it a good solution to trust that the life insurance companies do what is best for you as an employer?
- Will it affect the employer when about NOK 300 billion in capital related to current and previous earnings in defined contribution pensions - from 1.4 million working people and around 2 million pension capital certificates - will be covered by the new law? An active defined contribution pension agreement provides new opportunities for the individual, former capital is collected in a "new" account with the employer, and the individual can move to a self-selected supplier.
- When employees are given the opportunity to choose where they will manage their pension capital related to defined contribution pensions - should you as an employer have a relationship with it, or should you leave it to the pension provider?
- What is referred to as the "12-month rule" is changed in the Defined Contribution Pensions Act. Are you as an employer confident that you get all the relevant information you need? Do you want to get what is relevant to you - to understand how it affects your business from the life insurance provider?
There are many questions that are important for an employer to decide on, and many more can be asked. The answer to these questions is not "one size fits all". Here, the answer will vary from employer to employer, all depending on the individual company's situation, demographic conditions and the purpose of its pension and insurance agreements for the employees.
Since the answers to the questions are individual, it is not a definitive answer to give on a general basis. In this blog, I hope to give a slightly different perspective on what the change in the defined contribution pension law with the introduction of your own pension account can mean, and how you can get help to find the best solution for your company.
The law and the employer's information responsibility
A separate pension account was approved by the Storting on 6 November 2020. The law is precise in its description of an information responsibility that is imposed on employers towards their employees.
In summary, the employer must ensure that the employees - before they are included in the pension scheme and throughout the membership period - receive clearly defined information that allows them to make their own choices, including:
- Inform about the collection of the pension funds in a separate pension account
- Inform new employees - before they are included in the pension scheme - about the investment portfolio, risk, expected return and costs
- Inform employees "during the membership period" about the investment portfolio, risk, expected return and costs in the pension scheme
- For employees who have "a few years left until retirement", the company must provide information on risk-reducing measures
- Inform about the right to enter into an agreement with a supplier of your choice
- Inform that the transferred capital can be moved out
- Inform employees about the opportunity to choose their own investment profile
- The employer is also responsible for ensuring that employees receive information about significant changes in the regulations
The life insurance companies have promised that they will provide the employer with help to cover basic information according to the law.
Termination of the 12-month rule
In parallel with the introduction of a separate pension account, employees from 1.1.2021 will also gain ownership of their earned capital (the savings the employer has made) in their defined contribution pension scheme from the first working day. This is in contrast to before when you had to be employed for at least 12 months before you got what was saved from the employer.
The termination of the 12-month rule means that employers who have a high turnover with employees who have been employed for less than 12 months will have a greater pension cost burden. Where the employer previously received back the money that had been set aside for a pension for the individual who left before 12 months had passed, the employees now receive this money when they leave. A good solution for short-term employees, but at the same time it can be important to include in the budgets of an employer.
This rule further tightens the requirement for the employer to be up to date with its reporting to the pension providers. Especially employers with short-term employees such as replacements/seasonal workers, temp agencies, shops will notice this both in terms of costs and in the requirement for continuous updating in the registration. These are areas where it will be natural for Azets to offer services that help customers with both cost estimates and updating.
After the "big move", will there be a "new order"?
The new regime started by the turn of the year. Individual pension accounts and ownership of individual pension capital from the first working day is a reality. We are in a hectic period where all employees have to choose what they want to do. You can read about this in "What will happen to your pension from 2021?". What happens then? When we are at the "new normal", when the dust has settled, is everything then as before? Is it the case that we - both employers and employees - breathe a sigh of relief and trust that the life companies want us all well and that we are in the best hands? Or is the authorities' move so successful that we succeed in gaining a greater interest and awareness of our own finances. Both about the pension we will one day receive, and not least about the way forward until we will enjoy this pension.
Is best for employer = best for employee?
For most employees in the private sector who have a pension capital certificate, the new regulations will be positive. They will automatically have their previous earnings transferred into the current employer's occupational pension agreement and through this, the vast majority will achieve lower costs related to their pension capital. Few people have a close relationship with how the pension capital in their pension capital certificate is managed and what the costs are.
The question is whether it is certain that what is in the employer's agreement is always what will be best for the individual employee? Is it conceivable that through an interaction they will achieve even better solutions in the long run?
The employer has many factors to balance. Low costs in management and administration are important, but it is also often followed by the fact that standard choices form the basis of the pension agreement. That in itself is a very good starting point for most people. At the same time, the standard choices are just that, the same choice for all employees, only depending on age composition. Within the employer's agreement, it is in the vast majority of cases possible to deviate from the standard choice for how much risk the individual will take, but few people know or use this opportunity.
Through the introduction of a separate pension account, the law also allows the individual employee to transfer their pension capital to a self-selected supplier. Then employees who for various reasons have a desire for a different management than what is within an employer's options get an alternative. For most employees, the employer's agreement will be a solid choice, but the employer will not have to experience increased workload, increased costs or other challenges if some employees choose to take advantage of the opportunities provided by law.
The big question is of course, who has the competence to manage themselves? Should it be arranged for good advice to the employees when needed? The requirements for a self-selected supplier are at least as strict as for the employer's pension supplier. If it is arranged well, this can be a good thing for both the employer and the employees - who is not positive about that?
What about all employers who do not have a defined contribution occupational pension, can they sit back?
As an employer with an occupational pension agreement other than a defined contribution pension, you are not obliged to provide your employees with information about either their own pension account or a self-selected supplier. Maybe it is still valuable for your employees if you give them information that enables them to take action themselves?
There are conditions that you can of course get help with, for example getting information material from the accountant, or by getting advice and support from us at Söderberg & Partners.
In the short term, it will probably work out for both most employers and employees - especially those with a defined contribution pension - even if they do nothing. The authorities have made every effort to ensure that both the introduction period and ongoing operations work in a good way from the suppliers.
The question is what should you as an employer follow? What you can get from added value both for yourself and for employees. To what extent should you get involved and get help to take full advantage of the new opportunities?
Here we want to ensure that our customers get a safe path into new regulations and the opportunity to get the greatest possible benefit from these regulations. It does not have to be a burden, it can also be an "asset" for an employer. For us, the collaboration with Azets is important, not only because it is strategically correct and a good match, but also because it gives us an opportunity to provide good information and the best services and advice together.
Do you have questions about the introduction of your own pension account?
We are happy to help you. Contact your Azets contact person or by email to email@example.com.
Söderberg & Partners
Written in collaboration with our partner Söderberg & Partners