The coverage withoccupational pensions in Norway

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The coverage with

occupational pensions in Norway

Results from a survey of private sector companies

Axel West Pedersen

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Axel West Pedersen

The coverage with

occupational pensions in Norway

Results from a survey of private sector companies

Fafo-notat 2000:23

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Innhold

Innhold...3

1 Introduction ...5

Policy background ...5

Organisation of the paper ...8

2 Some institutional background ...9

3 Alternative data sources and estimates ...12

3.1 Membership records...12

3.2 Employee surveys ...15

4 The data ...18

5 Results ...20

5.1 The incidence of occupational pension plans...20

5.2 Incidence and quality of TPES-plans...22

5.3 The joint distribution of TPES, AFP and the provision of other types of retirement benefits ...25

6 Concluding remarks...27

References...28

Appendix ...30

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1 Introduction

It is notoriously difficult to obtain relevant and reliable information on occupational pensions in any of the OECD-countries. As we shall explain below, Norway is one of the countries where both official statistics and research on this topic has been particularly underdeveloped. Available income statistics show that benefits from occupational pension schemes play a significant and increasing role in the income packages of the present generation of old age pensioners in Norway. We do not, however, have any direct source of information on the level and distribution of accumulated pension rights among the economically active population. Even a rough snapshot of the participation in occupational pension schemes among a cross-section of wage-earners at a particular point in time can only be patched together with difficulty.

The purpose of this paper is to present and discuss available evidence about the coverage with occupational pension plans in the private sector of the Norwegian labour market. There are basically three main sources of information on coverage rates among private sector employees in Norway: a) aggregate figures on the number of active members obtained from pension funds and insurance companies, b) a series of individual level surveys conducted over the last decade, and c) a few company level surveys. In this paper we give particular attention to results from a survey of a representative sample of private sector companies that was conducted by Fafo and Opinion AS in 1996.¹ First and foremost, this study was designed to provide information on the scope and pattern of coverage with pension schemes among private sector companies, but it also included questions on variation in certain, very basic qualitative aspects of the schemes.

1.1 Policy background

Income security in old age is one of the functional areas of the welfare state where it is particularly justified to talk of a mixed economy of welfare. While the state is directly involved in the provision of old age benefits through national, statutory pension systems in all rich countries, it is an equally universal fact that also a range of private institutions contribute to the provision of retirement income. Occupational pension schemes – i.e.

schemes that are established and financed voluntarily by individual employers/companies or through collective wage agreements - are typically the most important

1 The study and its main findings have previously been presented in Norwegian - see Fløtten and Peder- sen (1996) pp. 29-46. The project and the associated company survey was financed by the Norwegian Confederation of Trade Unions (LO) and VAR Group ASA.

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private supplementary institutions and the most relevant substitutes for public provision (see Shalev ed. 1996).

The balance between public and private provision differs significantly across the OECD countries and so does, of course, the institutional architecture of both public and private pension systems. Furthermore, one should be careful to note that private provision by no means is synonymous with a complete absence of political influence and state involvement. Efforts to stimulate and regulate private pension schemes is an important part of the overall retirement policy package in many countries (see Duskin ed. 1992 and Hughes and Steward eds. 1999). In particular this tends to be so in countries where the national pension system is concentrated on some sort of minimum pro- tection in old age through flat-rate or means-tested benefits.

Norway, on the other hand, is a country where one - at least initially - would expect private provision of retirement income to play a relatively modest role. The social security system in Norway - the National Insurance Scheme (NIS) - combines a first tier of universal, flat-rate benefits with a statutory second tier of earnings-related benefits.

When the earnings-related tier was introduced in the late 1960s, it was intended and designed to cover the demand for income security among the majority of male wage earners and their (typically dependent) wives. In the key government white paper that published in 1964, stylised calculation of prospective benefits for this family type were presented, and they suggested a gross replacement well in excess of 2/3 of the previous average (male) wage (Stortingsmelding nr. 75 (1963-64), see also Pedersen 1990 p. 166 ff.). Hence, it was generally assumed that once this statutory earnings-related system had fully matured (from the beginning of the 21. century), occupational pension schemes and other forms of private pension insurance would be left to play a relatively marginal role as providers of lavish supplementary benefits – relevant primarily to a small minority of high income earners. (Hippe and Pedersen 1996)

Over the past two decades it has become clear that this expectation needs to be seri- ously revised. Occupational pension schemes continue to play an important and increasing role as income providers in old age – despite the continued maturation of the earnings-related second tier of NIS. According to available income statistics, benefits from NIS take up a declining share of the income packages of old age pensioners – from well above 70 percent in the early 1980s to about 60 percent in the mid 1990s. The share taken up by occupational pensions appears to have almost doubled over the same period – approaching 18 percent in the mid 1990s. (Dahl 1997 and Pedersen 1999)

Part of the explanation lies with piecemeal political and structural processes that have combined to produce an increasing gap between actual replacement levels offered by NIS and the demand for income security among broad segments of wage earners. The earnings-related second tier never reached the level of generosity that was originally en- visaged for full-time wage earners with average and above average wage levels. The most important political mechanism is a continued historical practice to let the so-called “base amount” – the key indexation parameter - lack behind the development in average wage levels. Another mechanism is linked to increased female labour force participation and the growing dominance of the modern two-earner couple. The benefit structure of NIS implies that replacement rates for the traditional male-breadwinner family were much

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higher than they are for the modern wage earner couple. Under the existing benefit formula, the gross replacement rate at average wage levels has fallen below 50 percent (for a married or cohabiting pensioner with a full contribution record) and it decreases very rapidly with increasing earnings levels. (Pedersen 1999)

Up until the very last years, the conventional image of a high degree of public dominance in the Norwegian pension system and a corresponding marginal role for private provision has been remarkably resistant. The gradual nature of the underlying processes helps explain why they for many years appeared to attract little attention from trade unions and other powerful interest groups, public authorities and the general public. This also helps explain the fact that relatively little has been done so far to secure systematic statistical monitoring of the participation in private occupational pension plans. The development of official statistics and research in this area is lacking behind in Norway as compared to countries like the US and the UK where private occupational pensions have traditionally played a larger role. ²

The last few years, however, the situation has changed. Considerable political attention has been given to occupational pension schemes and their role in the overall system of retirement provision. Two new pieces of legislation on private occupational pension schemes has been passed by Parliament this year and they are both expected to take effect from January 1. 2001. The first is a new law on defined contribution plans, which is the traditional form of occupational pensions in Norway. It represents a thorough revision of a set of regulations that have been in force since 1968. The second law represents a more radical break with existing regulations. It introduces, for the first time in Norway, favourable tax treatment for defined contribution plans.

The associated parliamentary debates have shown that there has now emerged a broad political consensus that occupational pensions have an important role to play as providers of income security in old age for broad segments of the labour force. A main objective of the new legislation – and in particular the law on defined contribution plans - is to facilitate a wider coverage with occupational pension schemes than has so far been observed.

It is not surprising, therefore, that there is growing demand for relevant and reliable information about the distribution of coverage and other important aspects of the existing occupational pension plans.

2 In the UK, large scale surveys of occupational pension coverage are conducted regularly by the so- called Government Actuary’s Department – see Government Actuary’s Department 1994. In the US, detailed questions on occupational pensions are regularly included in the Current Population Survey – see Employee Benefits Research Institute 1994.

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1.2 Organisation of the paper

The remaining part of the paper is organised as follows:

Basic features of the existing regulations and other relevant aspects of the institutional context are briefly described in Section 2. Section 3 provides a summary of results concerning the rate of coverage based on aggregate register data (membership records) and representative surveys conducted among individual employees. The design of Fafo’s 1996 company survey is described in Section 4 together with some technical information about the final sample. The main results from analyses of this survey are presented and discussed in Section 5, before the paper ends with a few concluding remarks in Sec- tion 6.

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2 Some institutional background

The institutional characteristics of the contemporary occupational pension “scene” in Norway have their roots in long historical traditions - both in the public and the private sectors.

The first general retirement scheme for civil servants, The Pension Fund for State Employees (SPK), was established in 1917. As the main rule it guaranteed a retirement benefit of 66 percent of the final salary. In the same year, collective pension insurance was introduced as a new product on the Norwegian insurance market, and the right for private companies to deduct premiums paid to pre-funded occupational pension schemes was formally recognised in the tax-code from 1922. (Hippe and Pedersen 1988:

61 ff)

During the first decades after World War II, coverage with occupational pensions was significantly expanded. All categories of state employees were eventually included in the final salary scheme of SPK. Most municipalities established similar final salary schemes for their workforce – first for white collar employees but later also blue collar workers in local government were generally included. During the same period a growing share of private sector companies established insured pension plans or company pension funds - typically with different benefit plans for the salaried staff (earnings-related benefits) and for blue collar workers (flat-rate benefits). In the early 1960s LO and the Norwegian Employer’s Association (NAF) agreed to implement a broad contractual pension scheme (FTP) for workers covered by central wage agreements. This scheme included about 1/3 of all private sector employees, and it is estimated to have raised the total rate of coverage to about 2/3 of all private sector employees (Pedersen 1990).

Occupational pensions were forced into a new role as secondary providers of retirement income when the system of means-testing in the national pension system was abolished in 1959 and as the earnings-related second tier of NIS was introduced in 1967.

In the public sector a special law was introduced to ensure that occupational benefits are integrated with benefits from NIS. The main principle is that the public sector occupational schemes continue to provide a final salary guarantee at 66 percent after 30 years of service, but now including (estimated) benefits from NIS. Since the late 1960s there has been practically universal coverage with integrated, defined benefit occupational pension plans among public sector employees. State employees are covered by SPK which is financed by general taxation. Employees in local government are covered by similar pension plans but these are pre-funded. Coverage among public sector employees is not a big issue, in particular not after adjustments have been made to reduce waiting periods and to include workers on part-time contracts (everybody with at least 14 hours per week must be included).

The introduction of an earnings-related second tier in NIS also had consequences for private sector occupational schemes. The broad contractual FTP-scheme was closed by

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the two sponsors, LO and NAF. However, the traditional tax-concessions to pre- funded company plans were continued and the associated set of regulations was revised in 1968. Before the major revision that is due to take effect from 2001, the favourable tax-treatment and the associated regulations of company pension plans – the so-called TPES rules of 1968 – have only seen minor changes over the past 30 years.

The tax-treatment of private occupational pension plans follows the traditional pattern that is sometimes labelled ‘EET’ – see Dilnot (1992). Contributions (by both employer and employee) and returns on accumulated funds are exempt from taxation, while benefits are subject to income tax when paid out to the pensioner. A non-trivial change in this tax-regime happened in the late 1980s when employer contributions to occupational pension plans were included in the base for the calculation of employer’s pay-role tax to NIS. Also, the comprehensive tax reform of 1992 lowered marginal tax rates on both labour income and capital returns, and hence it implied a significant re- duction of the degree of subsidy associated with the ‘EET’ regime.

Private company plans must satisfy the TPES-rules in order to qualify for this favourable tax-regime. The TPES-rules are fairly detailed and strict in a number of re- spects.

· A TPES-plan must be insured with a life insurance company or established as a separate company pension fund, and only defined-benefit schemes have so far been allowed. One of the core principles of the TPES-rules is that, if a company chooses to establish a pension plan, all standard, full-time employees of the company must be included. However, a waiting period of one year is allowed (five years for people below the age of 25), and part-time workers with less than 50 percent of full time and temporary and seasonal workers can be excluded. Vesting is achieved after 3 years, but there is no general guarantee for portability and transferability between company plans.

· The benefit plan can be integrated with the NIS benefit plan. There is no upper (or lower) limit on the gross replacement level offered. As a matter of fact most schemes offer a total final salary guarantees in the range between 59 to 70 percent. Earnings above the social security ceiling (presently set at approximately. two times average wage levels) cannot be taken into account, however. In addition the benefit plan is constrained by another core principle in the TPES-rules: the so-called principle of proportionality. It implies that TPES-schemes are allowed to compensate for the fairly progressive profile of the NIS benefit plan, but only up to the point where they aim at perfectly proportional total replacement rates. Total gross replacement rates cannot be higher for employees with higher earnings levels than for employees with lower earnings levels.

· As a main rule, old age benefits can only be paid from the age of 67 – corresponding to the retirement age in NIS.

All decisions about establishment and design of a TPES-plan are taken at the company level, and formally (if not always in practice) they are taken unilaterally by the employer.

Since the broad contractual FTP-scheme was closed down in the late 1960s, national

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unions and employers associations have left questions about supplementary pension coverage to individual companies. The fact that TPES-plans are developed locally and outside the system of national wage bargaining in the private sector, explains why the otherwise powerful national unions and employer’s associations have at best only sporadic information about the level and distribution of coverage with occupational pensions schemes within their respective constituencies.

With respect to early retirement the situation is radically different, however. NIS offers no opportunities to withdraw voluntarily from the labour market before the age 67, and, hence, the floor has been left open for occupational provision. In 1988 LO and the Norwegian Employer’s association (now called NHO for short) established a broad contractual scheme for voluntary early retirement (retirement before the age of 67). This so-called AFP-scheme is a ‘private’ institutional arrangement although it does receive direct subsidies from the state budget. It has over the years been expanded to cover more (organised) segments of the private labour market – also outside the LO-NHO central agreement. The voluntary retirement age in these schemes has been gradually reduced, and it has been brought down to 62 as from the spring of 1998

Finally we should mention the existence of a third type of occupational pension provision that continues to coexist with TPES-plans and the AFP-schemes. It is not un- common for private companies to provide various types of retirement benefits to former employees without pre-funding, as part of the company’s current expenditures.

Similarly, some companies contribute to insured pension plans (or individual annuities) for some of their employees, where the plan is, nevertheless, kept outside the TPES framework. These types of arrangement can be used either as an alternative or a supplement to an existing TPES-plan or to membership in the AFP-scheme. Companies with a regular TPES plan can use these kinds of alternative measures to pursue objec- tives that are otherwise ruled out under the TPES framework: i.e. provide retirement benefits for earnings in excess of the social security ceiling, provide retirement benefits before the age of 67, etc.

In this paper we concentrate most of the attention on describing the coverage with TPES-plans. We shall, however, in section 5.3 look at whether and to what degree the distribution of TPES-plans coincides with affiliation to the AFP-scheme as well as with the provision of other types of retirement benefits.

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3 Alternative data sources and estimates

3.1 Membership records

The membership figures that are kept and sometimes published by the various pension providers – the Pension Fund for State Employees (SPK), insurance companies and private and municipal pension funds - should in principle be a good and relevant source on the total number of covered wage earners in the Norwegian labour market. Various attempts have been made to collect and compile these types of figures for one or more time points and then relate them to official estimates of the total active workforce – excluding of course the self-employed.

Figure 3.1 shows a series of estimated coverage rates for the period between 1970 and 1998 based on this kind of approach. Estimates of the total number of registered members in pension plans for public sector employees and in plans for private sector employees are shown as percentage of the total estimated number of employed wage earners.³

It should immediately be noted that these aggregate membership figures should only be taken as a rough approximation – in particular for the earlier years. As we shall argue below, also the denominator is open to debate. Even so, some basic trends can hardly be disputed. The share of the total labour force covered with public sector occupational schemes grew very significantly between 1970 and 1990 as a simple reflection of a strong public sector employment growth. Also the rate of coverage with private sector occupational schemes appeared to grow – in particular during the 1980s. Hence, total pension coverage appears to have gone up from just above 30 percent in 1970 to almost 60 percent of the active labour force in 1990.

3 The background figures are given in table A1 in the appendix. One should note that the distinction between public sector and private sector plans is not entirely consistent. A few municipalities have chosen to insure their employees in private insurance companies, and they are here counted as members of private sector plans. More importantly, over the last decade many public service companies have been partly or totally privatised, and this has contributed to blur the boundary between the two sectors. Some of public service companies have chosen to leave SPK in favour of private insurance companies while others have chosen continue their affiliation to SPK or a local government pension plan.

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Figure 3.1: Rates of coverage with occupational pension plans. Estimates based on membership records.

0 10 20 30 40 50 60 70 80 90 100

1970 1975 1980 1985 1990 1995 1998

% of all wage earners

Public sector plan Private sector plan Without coverage

Sources: Hippe and Pedersen 1992, Pedersen 1997, NOU 1998:1 p. 37, and NOU 1999:32 p. 107

It should immediately be noted that some of the underlying membership figures should only be taken as a rough approximation – in particular for the earlier years. As we shall argue below, also the denominator is open to debate. Even so, some basic trends can hardly be disputed. The share of the total labour force covered with public sector occupational schemes grew very significantly between 1970 and 1990 as a simple reflection of a strong public sector employment growth. Also the rate of coverage with private sector occupational schemes appeared to grow – in particular during the 1980s. Hence, total pension coverage appears to have gone up from just above 30 percent in 1970 to almost 60 percent of the active labour force in 1990.

After 1990, however, the graph gives indications of a tendency for total coverage to stabilise and in fact decline. Part of the explanation might lie with changes in data quality. For some years, the Pension Fund for State Employees (SPK) only published what seems to have been very rough estimates of the number of active members, and also the aggregate information on total membership in private and local government pension funds is likely to vary in quality. Membership figures in earlier years might in particular have been somewhat inflated by a tendency to include disability pensioners in the statistics on private sector company funds. The background figures for 1998 presented in table 3.1 are presumably of a better quality and they might therefore provide a lower and more realistic estimate of the total number of active pension plan members than in earlier years. Still, it can hardly be disputed that total pension coverage has seized to grow and even been declining somewhat from the early 1990s .

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Table 3.1: Estimated rate of coverage in the general labour force and in the private sector by 31.12 1998.

The conventional method based on membership records.

Number of active participants in public sector plans 620,000

Number of active participants in private sector plans* 492,000

Sum 1,112,000

Total number of employed wage earners 2,082,000

Estimated rate of coverage including public sector employees 53 %

Estimate of private sector employment 1,462,000

Estimated rate of coverage in the private sector 34 %

* The figure includes some 27 thousand employees in municipalities that have established insured pension plans with a private life insurance company

Source: NOU 1999:32, p. 107.

Table 3.1 also presents a separate estimate of the rate of coverage among private sector employees, which has been widely used in the public debate. It builds on the assumption that coverage among public sector employees is universal and, hence, that the number of employees covered by public sector occupational schemes can be taken as an estimate of total public sector employment. This gives an estimate of the total private sector employment of almost 1.5 million, and the private sector pension coverage should then be in the area of 34 percent..

There is reason to believe, however, that this should be regarded as a lower bound estimate. The total labour force figures used in figure 3.1 and table 3.1 include all individuals with at least one hour of paid work per week.⁴ Hence, it is likely to comprise students, pensioners, and others groups who do not consider paid employment as their main occupation and only have a very loose and sporadic attachment to the labour market at the time of measurement. One might reasonably argue that only individuals with a certain level of attachment to the labour market, should be included in the definition and the practical calculation of the coverage rate at a particular point in time. Of course, it is open to debate just how tight the boundary should be drawn, and the potential effect on the observed coverage rates depends crucially on this.

An additional source of downward bias in the calculation of the private sector coverage is linked to the implicit assumption about complete coverage among public sector employees. Although the public sector schemes are highly inclusive, they do exclude certain groups of part-time and temporary workers. Therefore, it cannot be taken for granted that all wage earners without pension coverage must necessarily belong to the private sector.

The main weakness of this approach and the use of membership records as a source of information on pension coverage lies with the fact that it cannot give any indication of the distribution of coverage. Individual level and company level survey might have their own serious weaknesses when it comes to estimating the overall level of coverage.

They do, however, provide opportunities to look at how individual pension coverage is

4 The aggregate employment figures are taken from the national accounts. There is a break in this series between 1975 and 1980, but it is not likely to have a significant impact on the coverage estimates.

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distributed between categories of wage earners and how the incidence of pension plans varies across industries, labour market segments and according to company characteristics.

3.2 Employee surveys

Over the last decade Fafo has conducted and/or analysed a series of representative individual level surveys that included questions about participation in an occupational pension scheme. Table 3.2 gives a summary of the results from a selection of these surveys.

Two striking deviations from the picture that emerged from the membership records are revealed in the table:

· The overall coverage rates are surprisingly high – in particular among private sector employees.

· Coverage rates appear to have been stable or rising rather than declining since the late 1980s

The first point might partly be explained by the fact that only individuals who define themselves as wage-earners are included in the denominator. Respondents are asked to classify themselves according to their main occupation, where student, pensioner, homemaker are among the available alternatives. Hence, there is reason to believe that the calculation of coverage rates here is based on a more narrow – and arguably a more relevant - definition of the target group. An alternative explanation is that systematic non-response and processes of self-selection produce samples where more well-off categories of wage earners with a high probability of coverage tend to become somewhat over-represented. Finally, it is possible to imagine that respondents tend to misreport their true status in terms of pension coverage. Some might be inclined to give an affirmative answer also in cases where they recently moved from a job with to a job without pension coverage. Others might confuse membership in an occupational pension scheme with contributions to an individual insurance contract or with membership in the AFP-early retirement scheme.

The pattern of variation over time is more difficult to account for. As argued in the previous section, there is little indication of a true increase in coverage levels over this period. Changes in the exact wording of the relevant question between different surveys might play a role. One could also speculate whether an increasing consciousness about retirement issues in the general public over the last decade has contributed to fewer cases where the respondent is unaware of his/or her membership in an occupational pension scheme – i.e. an important source of underreporting has been at least partly eliminated.

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Table 3.2: The overall rate of coverage with occupational pension schemes. Results from a selection of representative employee surveys

All employees (including the public sector)

Private sector employees

1987 (Hippe and Pedersen 1988) 52 % 40 %

1992 (Hippe and Nergaard 1994) 63 % 47 %

1996 (Fløtten and Pedersen 1996) 58 % 47 %

1999 (Flaa and Pedersen 1998)* 60 % 54 %

* The sample includes only wage earners aged 59 or less

Table 3.3 shows some results on the distribution of coverage between different categories of private sector employees taken from the most recent of these individual level surveys.

· Reported coverage appears to be somewhat higher among male as compared to female wage earners in the private sector.⁵

· There is little variation according to age, except for a somewhat lower coverage in the age group below 30. The level of education has only a modest relation to pension coverage, although the most highly educated groups stands out with an above average level of coverage.

· There is relatively strong variation according to the level of personal income (earnings) – both between the low and middle income group and between the middle and high income group. The probability of being covered is twice as high in the high income group as compared to the low income group (corresponding to an odds-ratio of 4.8). Presumably a low coverage among part time workers helps to explain the observed differences between male and female wage earners, and it is also likely to be an important factor behind the difference in coverage between the low and middle income groups.

· Finally, there seem to be some modest differences according to the trade union affiliation of private sector employees. Workers who belong to an LO-affiliated union have somewhat lower coverage rates than other union members, but they have significantly higher coverage than non-members. Although, national unions are not directly involved in decisions about the establishment of occupational pension schemes (TPES-schemes), it appears that pension coverage is higher in the organised segments of the private sector labour market.

5 Since a higher proportion of female wage earners work in the public sector where coverage is almost universal, the overall coverage with occupational pensions is about as high among female wage earners as it is among males.

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Table 3.3 Self-reported participation in occupational pension schemes. Results from a representative sample of private sector employees aged 59 or less. 1998

N

All 54 % 256

Gender Male 59 % 164

Female 47 % 91

Age <30 37 % 68

30-44 62 % 117

45-59 59 % 71

1-3 51 % 128

4-6 52 % 78

Years in secondary and tertiary education

>6 66 % 50

Personal income in 1000 NOK. 0-200 36 % 85

200-300 56 % 96

300+ 73 % 73

Trade union affiliation LO 60 % 67

Others 77 % 52

Non-member 42 % 130

Source: Own calculations. The main results from this survey have been published in Flaa and Pedersen (1999).

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4 The data

Decisions whether to establish or not to establish an occupational pension plan (TPES- plan) are taken at the company level. Company managements are therefore highly relevant sources of information about the distribution of coverage across industries and according to other relevant characteristics of the company: size, economic situation, labour relations, composition of the company labour force etc. It is also a relevant source of information on variation in the quality of pension plans – an aspect that is very difficult to cover in individual level surveys.

In 1996 Fafo carried out a company survey in collaboration with Opinion AS. The survey was organised as telephone interviews with company executives, and the final sample included representatives of 600 companies. The gross sample was drawn from a universe of private sector companies registered with at least five employees. The sample was pre-stratified according to company size in order to ensure a good representation of both small and large companies.

A company survey can be used to make general claims about two very different statistical populations: the population of companies or the underlying population of employees. The two populations are very different as can be seen from table 4.1. The smallest category of companies with between 5 and 19 employees constitute no less than 74 percent of the entire population of private sector companies (with more than 5 employees), while they only represent about 25 percent of all private sector employees.

By contrast, companies with more than 200 employees only make up 2 percent of all companies, but they are shown to account for 37 percent of total employment. If one was exclusively interested to generalise to the universe of companies, a simple random sample of companies would clearly be the most appropriate solution. If, on the other hand, all interest is attached to the underlying distribution of employees, it would be logical to let the probability of inclusion into the sample vary in direct proportion to the number of employees in each company.

In the pre-stratification of this sample it was decided to pursue a kind of compro- mise between these alternative procedures. Large companies have been strongly over- sampled, but not quite in proportion to their estimated share of total employment.

Hence, in order to make claims about the general distribution of either companies or the total private sector employment, the data must be weighted. The second last row of table 4.1 shows the sample weights that were constructed in order to make the material representative with respect to the distribution of private sector employment. These (employment) weights are used generally throughout the following chapter. However a few results are presented also for un-weighted estimates and estimates that are weighted in order to refer to the population of companies.

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Table 4.1: Sample size, non-response and sample weights.

Company size: number of employees

5-19 20-49 50-99 100-199 200+ All

Size of gross sample 264 253 254 121 127 1019

Non-response rate 43 % 41 % 41 % 38 % 41 % 41 %

Size of net sample 150 150 150 75 75 600

Share of all companies in population 74 % 17 % 5 % 3 % 2 % 100 % (N=22.262) Estimated share of total employment 25 % 20 % 8 % 10 % 37 % 100 % (N=1.1 mil.)

Sample weights (share of employment) 0.99 0.80 0.33 0.77 2.97 -

Weighted sample size 149 120 50 58 223 600

Source: Fafo/Opinion AS 1996

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5 Results

5.1 The incidence of occupational pension plans

Estimates of the general incidence of occupational pension plans are presented in table 5.1. 54 percent of the companies in the sample report to run an occupational pension plan (TPES-plan). When the data are weighted according to their estimated share of total employment (in private sector companies with more than five employees), the rate increases to 59 percent. We might say that the companies reporting to run an occupational pension plan in this sample, account for an estimated 59 percent of the total private sector employment.

One should note that the result obtained changes very dramatically when the data are in stead weighted in order to represent the population of companies. In this case the estimated rate drops to 39 percent. The reason for the large discrepancy is of course - as we shall demonstrate below – that the incidence of pension plans varies very strongly with company size. This clearly illustrates the need to have a clear conception of the type of generalisation pursued with this kind of data, and of the associated choice of sampling and weighting strategies.

Table 5.1 Share of private sector companies who report to run a regular supplementary pension scheme (TPES), and the share reporting to be affiliated to an AFP-early retirement plan. N=600.

Un-weighted data Weighted data (Share of employment)

Weighted data (Share of companies)

TPES 53.5 % 59.1 % 38.6 %

AFP 52.5 % 54.8 % 32.4 %

An employment adjusted TPES incidence of 59 percent, might appear to be high in comparison with the coverage rates that were presented in chapter 3 above. However, the figures are not directly comparable. First of all, it should once again be emphasised that companies with less than five employees are excluded from the sampling frame in this survey. Presumably pension coverage is very low among these very small companies, while they account for a non-trivial part of the total private sector labour force.

Secondly, it should be kept in mind that not all employees working in companies with a pension plan, will in fact participate at a given point in time. The possibilities offered to exclude workers on part-time contracts (less the 50 percent), temporary contracts etc.

can in many cases significantly reduce the effective coverage among the company workforce.⁶ There is, however, also a possibility that there is a certain propensity to give

6 A rather extreme example here is the large service company ISS Norway where only little more than 2000 out of a total workforce of 8000-9000 employees actually participated in the company pension plan by the end of 1999 (Pedersen 2000).

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false affirmative answers to the question, whether the company has established a TPES plan. A follow-up question about target replacement rates, resulted in a rather high share of respondents answering that they could not indicate a target level of replacement. It is possible but not certain that some of these have in fact misinterpreted the initial question.

The second row of table 5.1 shows the corresponding set of results concerning affiliation to the AFP-early retirement schemes. One can see that the estimated rates of participation are very similar to the TPES-rates.

Table 5.2: Variation in the incidence of TPES-plans and affiliation to AFP according to company size. Data weighted according to share of employment.

Company size: number of employees

<19 20-49 50-99 100-199 >200

TPES 33.6 % 44.6 % 58.0 % 75.9 % 79.9%

AFP 24.2 % 47.9 % 68.0 % 65.5 % 73.2 %

N 149 120 50 58 223

As one might expect, the incidence of occupational pension plans shows strong variation with company size.⁷ In companies with less than 20 employees only a third report to have established a TPES-plan. Among companies with more than 200 employees the corresponding share is 80 percent. The difference between the smallest and the largest category corresponds to a odds-ratio of 7.9. A rather similar pattern appears to apply to participation in the AFP-scheme.

In table 5.3 the material has been broken down into a set of broad industry categories. As one might expect, the incidence of TPES-plans is very high in financial services (mainly banks and insurance companies). The incidence is lowest in the category including retail and wholesale trade as well as the hotel and restaurant businesses with a total estimated incidence of 29 percent. These industries are labour intensive and known for modest wage levels, a large turnover of employees as well as companies, a wide- spread use of part-time contracts, and a high proportion of female employees. Also the building and construction industries show a below average incidence of TPES-plans.

Contrary to the former category, these are traditional male dominated industries and they are not known to be particularly low paid. The explanation here might be that building and construction are industries with a large fraction of smaller companies, a tradition for spot-market type labour relations and a tendency for high turnover of both employees and companies.

The large and very heterogeneous categories of manufacturing and ‘other private services’ appear in the aggregate to have about average levels of coverage with TPES- plans. A finer breakdown into more specific industry branches would undoubtedly have shown examples of very strong cross-industry variation in coverage levels. Unfortu- nately, the material is too small to allow for a very detailed industry breakdown.

7 Note that the information on the number of employees is here based on information given in the inter- view. It does not correspond perfectly to the register information on company size that have been used in sample stratification and weighting procedures. This is why we have encountered a few companies with less than five employees.

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The causal mechanisms behind such industry variations are difficult to sort out.

Wage levels, turnover rates and the age distribution among the workforce are likely to influence the demand for additional pension coverage. Economic performance and the degree of price competition facing the company are factors that are likely to affect the ability and willingness do endure the costs of a pension plan. However, also different historical traditions and intra-industry diffusion, learning and interdependence are likely to play a role. Individual companies have a stronger rationale for establishing a TPES- plan if they recruit from a segment of the labour market where pension plans are a common, and it is reasonable to assume that the costs of a pension plan are more ac- ceptable if also the competitors in the company’s product markets have established costly pension plans.

Table 5.3: Variation in the incidence of TPES-plans and affiliation to AFP according to type of industry.

Data weighted according to share of employment.

Type of industry Manufacturing

and mining

Building/- construction

Retail and wholesale trade, hotells and

restaurants

Transport Financial services

Other private services

TPES 68.8 % 40.0 % 28.6 % 72.3 % 93.3 % 68.4

AFP 79.8 % 53.3 % 39.0 % 53.2 % 93.3 % 34.3 %

N 198 45 105 47 15 172

5.2 Incidence and quality of TPES-plans

TPES-plans can be designed in many different ways and they can be everything from very modest, almost symbolic supplements to extremely generous supplementary pension schemes. In order to add some measurement of the quality of schemes, the companies were asked to indicate the target level of replacement promised by the company’s pension scheme. In most but not all cases, this question will have a rather straightfor- ward answer, since TPES-plans are typically integrated with NIS-benefits to achieve a certain gross replacement rate. Still, the figures should only be seen as giving a rough approximation to variations in the quality of pension plans.

Table 5.4 shows the results when answers to the questions about the existence and quality of pension plans have been combined. Among companies that report to have a TPES-plan, about a quarter cannot indicate the gross replacement level. Another quarter report that the target replacement level is 60 percent or lower. On the other hand, a small minority of 9 percent of the entire sample and 14 percent of the companies with pension plans report that their target replacement rate is higher than 66 percent. These seem to be plans that can compete in generosity with the public sector occupational schemes.

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Table 5.4: The distribution of companies with respect to incidence and quality of TPES-plans. Data weighted according to share of employment. All companies (first row) and companies reporting to have a pension plan (second row) N=600/355.

No TPES scheme Replacement level unknown

Replacement level <61%

Replacement level 61-66%

Replacement

level >66% Sum

40.8 % 13.6 % 16.8 % 20.0 % 8.8 % 100 %

N=600

- 25.6 % 27.5 % 32.7 % 14.2 % 100 %

N=355

Figure 5.1. Variation in the incidence and quality of TPES-plans according to company size. Data weighted according to share of employment.

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 %

<20 20-49 50-99 100-199 >200

>66%

61-66%

<61%

Level unknown No scheme

* The figures behind the graph are reported in the appendix table A2.

In figure 5.1 this variable is compared across different size categories. The most inter- esting point to note here is that there appears to be little systematic variation in the incidence of the most generous type of scheme. The very large companies have a much higher propensity to establish pension schemes but a relatively large proportion of the plans appear to be of rather poor quality.

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Figure 5.2. Variation in the incidence and quality of TPES-schemes according to industry categories. Data weighted according to share of employment.*

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 %

Manufacturing and mining

Building and construction

Trade, hotels and restaurants

Other private services

>66%

61-66%

<61%

* The figures behind the graph are reported in the appendix table A3

Observed differences between industry categories stand out more clearly when also qualitative aspects are taken into consideration in figure 5.2. In particular one should note that although the simple coverage rate among manufacturing industries is high, only 20 percent of all manufacturing companies report to have plans with medium to high replacement rates. TPES-plans with replacement rates below 61 percent are quite common among traditional manufacturing companies.

Finally figure 5.3 shows a break-down of the sample according to the nature of collective wage agreements. Companies that do not belong to an employers association and remain outside the system of collective wage bargaining have the lowest coverage with TPES schemes, while the share with very generous schemes is relatively high. The group of companies with collective agreements both with one or more LO-affiliated unions and with unions outside LO has the highest overall coverage, but at the same time relatively few very generous schemes. Presumably this group mostly consists of large manufacturing enterprises.

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Figure 5.3: Variation in the incidence and quality of TPES-schemes according to the nature of collective wage agreements. Data weighted according to share of employment.*

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 %

No collective wage agreement

Only with LO LO and others Only with others Collective wage agreement

>66%

61-66%

<61%

* The figures behind the graph are reported in the appendix table A4

5.3 The joint distribution of TPES, AFP and the pro- vision of other types of retirement benefits

It was shown in section 5.1 that the coverage with TPES-plans and affiliation to the AFP-early retirement scheme were rather similar on the margin. That does not say much about the joint distribution of the two types of retirement scheme. Table 5.5 shows that there is only a partial overlap between the distribution of TPES-plans and participation in AFP. 38 percent of all companies feature both types of retirement provision, while 24 percent have neither the one or the other. The remaining 38 percent fall in the remaining diagonal cells with just one of the two types of retirement provision. However, although the overlap is far from perfect, there is clearly a positive association between the two types of retirement provision as one would expect from the previous analysis.

Companies affiliated to AFP are more likely than non-affiliated companies to have established a TPES-plan – and vice-versa.

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Table 5.5: Share of companies with different combinations of TPES and AFP. Data weighted according to share of employment. N=600.

AFP Total

No Yes

No 24.2 16.8 41.0

TPES

Yes 21.0 38.0 59.0

Total 45.2 54.8 100.0

The questionaire also contained questions about various sorts of retirement provision organized outside the framework of TPES. Here one could imagine that this would be most common among companies that have chosen not to establish a TPES-scheme.

This is appears not to be the case. Table 5.5 shows that the share of companies without some retirement provision decreases somewhat, to 28 percent when these alternative measures are taken into account. Still, most of the companies that report to have some kind of alternative retirement provision do this as a supplement to a standard TPES- plan. Half of the companies with a TPES-plan report to provide also alternative forms of retirement benefits.

Table 5.5: Share of companies with different combinations of TPES and other types of retirement provision. Data weighted according to share of employment. N=599.

Other types of retirement provision Total

No Yes

No 28.2 12.7 40.9

TPES

Yes 29.7 29.4 59.1

Total 57.9 42.1 100.0

Finally, table 5.6 provides information on the relationship between participation in the AFP-scheme and the propensity to provide of other types of early retirement benefits.

Only 16 percent of the sample report to provide early retirement benefits outside the framework of the AFP scheme. However, the overwhelming majority of companies who do provide this kind of benefit also participate in the AFP-scheme. Almost a third of the AFP-affiliated companies report to have supplementary expenditure on early retirement. 42 percent of the sample report to have no provisions and expenditures on early retirement at all.

Table 5.6: Share of companies with different combinations of AFP and other types of early retirement provision. Data weighted according to share of employment. N=600.

Other types of early retirement provision Total

No Yes

No 41.7 3.5 45.2

AFP

Yes 42.0 12.8 54.8

Total 83.7 16.3 100.0

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6 Concluding remarks

In this paper we have striven to put together a rather sketchy and ambiguous picture of the coverage with occupational pension plans among private sector jobs. Both the level of coverage and its distribution among private sector companies and employees appears to be roughly in line with the picture obtaining in other OECD-countries with a similar decentralised structure of company specific pension plans – like the UK and the US (see Government Actuary’s Department 1994 and Employee Benefits Research Institute 1994, respectively). Large segments of private sector employees are left uncovered. Pen- sion plans are relatively infrequent among small companies in general and in particular in typical low-skill/low pay industries with a high turnover rate among firms as well as employees. At the individual level the distribution of coverage appears to be strongly related to the distribution of traditional human capital variables like education, experi- ence and tenure, and coverage is particularly low among (female) workers in non- standard labour contracts – like part time and temporary jobs (see for instance Bloom and Freeman 1992 and Even and Macpherson 1994 and 1996).

There is reason to believe that the level and distribution of income among future generations of old age pensioners to a significant degree will be determined by the distribution of pension rights earned through participation in occupational pension schemes. Favourable tax rules and the associated regulation of occupational pension plans have become an important part of the overall retirement policy in Norway. This has been emphasised during the preparation of the pending reform of the regulatory framework for occupational pension schemes, where for the first time also defined- contribution plans will be entitled to indirect subsidies through the tax system.

Therefore the demand for reliable statistical information about this theme is likely to increase. Even a highly accurate and detailed snapshot picture of the distribution of coverage would only be a very preliminary step towards an adequate understanding of the long-term economic and distributive consequences of the present system of occupational pension plans. In addition one would need information about the flow of individual workers between jobs with and without pension coverage and jobs with pension rights of a varying quality. In order to make reasonable projections of the level and distribution of occupational pension rights that the present generations of wage earners will carry into retirement, it is necessary to study participation in occupational pension schemes in a longitudinal perspective. The development of adequate instruments for statistical monitoring and data collection in this field represents a major challenge for the statistical authorities in Norway.

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References

Bloom, David E. and Richard B. Freeman (1992): The fall of private pension coverage in the U.S.” American Economic Review. Vol. 82: 539-545.

Dilnot, Andrew (1992): ”Taxation and private pensions: costs and consequences.” In Duskin, Elizabeth: Private pensions and public policy. OECD Social Policy Studies no.

9. Paris: OECD.

Duskin, Elizabeth ed. (1992): Private pensions and public policy. OECD Social Policy Studies no. 9. Paris: OECD.

Employee Benefits Research Institute (1994): Employment-Based Retirement Income Benefits, Analysis of the April 1993 Current Population Survey. EBRI Issue Brief no. 153.

Washington DC: Employee Benefits Research Institute.

Even, William and David Macpherson (1994): ”Gender differences in pensions”. Journal of Human Ressources. Vol. 29: 555-587.

Even, William and David Macpherson (1996): ”Employer size and labor turnover: The role of pensions. Industrial and Labor Relations Review. Vol. 49:707-728.

Fløtten, Tone and Axel West Pedersen (1996): Sikkerhetsordninger i det norske arbeidsmarkedet. Fafo-rapport nr. 207. Oslo: Fafo.

Flaa, Jardar and Axel West Pedersen (1999): Holdninger til ulikhet, pensjon og trygd. Resultater fra en spørreundersøkelse. Fafo-rapport nr. 305. Oslo: Fafo.

Government Actuary’s Department (1994): Occupational pension schemes 1991 9th survey by the Government Actuary. London: HMSO.

Hippe, Jon M. and Kristine Nergaard (1994): Tilleggsordninger i arbeidslivet. Fafo-notat 1994:11. Oslo: Fafo.

Hippe, Jon M. and Axel West Pedersen (1988): For lang og tro tjeneste? Pensjoner i arbeidsmarkedet. Fafo-rapport nr. 84. Oslo: Fafo.

Hippe, Jon M. and Axel West Pedersen (1992): Når jobben betaler. En analyse av velferdsord- ninger i arbeidsmarkedet. Fafo-rapport nr. 136. Oslo: Fafo.

Hippe, Jon M. and Axel West Pedersen (1996): ‘Labor Movement, Social Policy, and Occupational Welfare in Norway.’ In Shalev, Michael (ed.): The Privatization of So- cial Policy? Occupational Welfare and the Welfare State in America, Scandinavia and Japan.

London: Macmillan.

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Hughes, Gerard and Jim Steward eds. (1999): The role of the state in pension provision: Em- ployer, regulator, provider. Boston: Kluwer Academic Publishers.

Pedersen, Axel West (1990): Fagbevegelsen og folketrygden. LOs målsetninger, strategi og innflytelse i pensjonspolitikken 1945-1966. Fafo-rapport nr. 110. Oslo: Fafo.

Pedersen, Axel West (1997): Do public pensions hamper the growth of private pensions? A com- parative study of time series data for Denmark and Norway. CWR Working Paper No.7/1997. Copenhagen: Centre for Welfare State Research, The Danish Na- tional Institute for Social Research.

Pedersen, Axel West (1999): Trygd og fordeling. I Langeland, Ove (red.): Mellom frihet og fellesskap. Det 21. århundrets velferdssamfunn. Oslo: Tiden Norsk Forlag.

Pedersen, Axel West (2000): Konkurranseutsetting og pensjon. En kvalitativ undersøkelse av pensjonsforholdene blant private bedrifter i tre utvalgte bransjer. Fafo-rapport nr. 338 (elec- tronic publication). Oslo: Fafo.

Shalev, Michael (Ed.) (1996): The Privatization of Social Policy? Occupational Welfare and the Welfare State in America, Scandinavia and Japan. London: Macmillan.

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Appendix

Table A1. Active members in public and private sector plans and total number of active wage earners in 1000s.

1970 1975 1980 1985 1990 1995 1998

Public sector plans

SPK 175 259 285 290 295 270 270

KLP* 30 70 126 166 225 247 256

Independent municipal pension funds 30 45 65 80 90 88 94

Sum 235 374 476 536 610 605 620

Private sector plans

Insured plans 165 225 271 358 407 340 353

Company pension funds 30 35 40 50 73 115 131

Other - - - - - 6 8

Sum 195 260 311 408 480 461 492

All employed wage earners 1356 1486 1691 1792 1834 1914 2082

*KLP is a non-profit insurance company that covers the majority of local government employees.

Table A2: Variation in the incidence and quality of TPES-plans according to company size. Data weighted according to share of employment.

<20 20-49 50-99 100-199 >200

No scheme 66.5 49.6 46.4 26.1 16.8

Level unknown 15 11.1 7.1 24.6 12

<61% 4.8 10.3 8.9 17.4 33.5

61-66% 8.4 18.8 23.3 29 26.7

>66% 5.4 10.3 14.3 2.9 11

100.1 100.1 100 100 100

Table A3: Variation in the incidence and quality of TPES-schemes according to industry categories. Data weighted according to share of employment.

Manufacturing and mining

Building and construction

Trade. hotels and restaurants

Other private services

No scheme 36.4 60.0 71.4 27.7 6.7 31.4

Level unknown 13.6 13.3 7.6 14.9 19.2

<61% 30.3 4.4 9.5 2.1 12.8

61-66% 18.2 15.6 6.7 44.7 6.7 25.0

>66% 1.5 6.7 4.8 10.6 86.7 11.6

100 100 100 100 100 100

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Table A4: Variation in the incidence and quality of TPES-schemes according to the existence and nature of collective wage agreements. Data weighted according to share of employment.

No collective agreement Only with LO LO and others Only with others

No scheme 51.6 43.1 9.8 38.2

Level unknown 16.4 16.7 3.9 2.9

<61% 6.3 18.2 45.1 2.9

61-66% 16.8 17.2 36.3 11.8

>66% 9 4.8 4.9 44.1

100.1 100 100 99.9

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The coverage with

occupational pensions in Norway

Although there are strong indications that occupational pension plans play a significant and increasing role in the Norwegian pension system, little is known about the level and distribution of accumulated pension rights among the economically active population.

The purpose of this paper is to present and discuss available evidence about the coverage with occupational pension plans in the private sector of the Norwegian labour market. Three alternative data sources are available each with their respective strengths and weaknesses: a) aggregate figures on the number of active members obtained from pension funds and insurance companies, b) a series of individual level surveys conducted over the last decade, and c) a few company level surveys.

The paper gives particular attention to results from a survey of private sector companies that was conducted by Fafo and Opinion AS in 1996.

Institute for Applied Social Science P.O. Box 2947 Tøyen

N-0608 Oslo

Fafo-paper 2000:23 ISSN 0804-5135