NORWEGIAN LIFE INSURANCE AND PENSION Future possibilities and challenges Idar Kreutzer Managing director, Finance Norway 2 Welcome to The Norwegian financial sector More than 2000 companies, employs NOK billion in assets under management Efficient and productive 2% of total employment, 7% of total value creation Spread and versatile structure - but, small 3 Sources: Sveriges Riksbank, Finanstilsynet, Statistisk sentralbyr The financial sectors contribution to society Credit makes other sectors more productive Provides risk relief Large employer and taxpayer Highly compentent work force and high level of productivity Norwegian welfare and wage levels require high level of productivity Source: Statistisk sentralbyr 4 Pillar 1: The Public pension system (pay-as-you-go) Pillar 2: Occupational pension schemes (with tax benefit) Pillar 3: Individual pension schemes (with tax benefit) Other individual saving and employer sponsored schemes 5 The Norwegian pension system Pillar 1 Pillar 2 Pillar 3 The Public pension system Pillar 1 New elements: All years in work counts Life expectancy divisor Flexible retirement age between 62 and 75 year Lower longevity risk Incentives to work longer % Assumed: The old public pension system: annual salary NOK , a 40 year career. New public pension system: a 40 year career, all years in work counts, 10 % lower income than the best of 20 years in the old system. Withdrawals at age of 67 years. Old system: -Normal pension level 52-54% New system: -Normal pension level 44% A person need to work 1,8 years longer, to get equal pension level Effects: The Norwegian occupational pension market 7 Defined benefit (DB)Defined contribution (DC) and hybrid pensions Private sector maximum 70 per cent (net based) The Public pension system Public sector 66 per cent (gross guarantees) The Public pension system The Public pension system Defined contribution OTP OTP: mandatory minimum level of occupational penions, introduced by law in The OTP requirement may be fullfilled by all types of occupational pension schemes. Pillar 2 Annual guarantees Average interest rate guarantees 3.5 % Average duration of liabilities is years Falling interest rates Source: Finance Norway/Ecowin Lower interest rates Increasing insurance liabilities Longer life expectancy Forventet gjenstende levetid ved 60 r - Historisk utvikling siden Fremskrivning til 2100 (SSBs mellomalternativ) Source: Statistics Norway New mortality tables, K2013 (Dynamic model) Old mortality tables, K1963 (Static model) Revised mortality tables, K2005 (Static model) Men Women Life expectancy of a person 60 y.o. -Historical development since Projections till 2100 (Statistics Norway, medium alternative) Life expectancy an international comparison 10List by the World Health Organization (2013) Published, 2015 New EU requirements 11 Life insurance liabilities 12 Total insurance liabilitiesNOK billion Privat occupational pensions (incl. union collective pensions) NOK 489 billion Public collective pensionsNOK 440 billion Source: Finance Norway 89 per cent of total insurance liabilities 13 Private occupational pension schemes - liabilities Pillar 2 NOK billion Trends Growth in defined contribution pension schemes (DCs) Converting of defined benefit plans (DBs) to defined contribution plans (DCs) Growth in paid-up policies with guarantees Paid-up policies with investment choice Some new hybrid products in pipeline 14 Pillar 2 Public occupational pension schemes - municipalities The Norwegian Public Service Pension Fund (Statens Pensjonskasse) is Norways main provider of public occupational pensions. This is a pay-as-you-go pension scheme and covers the Central government sector, excl. municipalities). In addition, life insurance companies and pension funds provides public pension to municipalities (funded). Trends Increasing growth in expenses in municipalities pension Public occupational pensions provided by life insurance companies (liabilities). NOK billion Market development in private sector number of members Occupational pension schemes in private sector Paid-up policies (guaranteed) and capital pension certificates Pillar 2 NOK billion Current situation and challenges Defined benefits and paid-up policies Long-lasting low market interest rate Longevity and principles for building reserves Current regulation of paid-up policies particularly demanding Use of transitional rules in Omnibus II on Norwegian paid-up policies will somewhat ease the situation The annual guaranteed interest rate still implies a high risk of managing paid-up policies, and regulations need to be changed to get a sustainable system. The introduction of Solvency II entails a need for 4-5 times more capital, and requires a softening of the annual guarantee requirements. Non-existing competition is a result Current issues Holders of paid-up policies with an interest rate guarantee may convert to investetment choice Voluntary for holders and do not fit all holders Contracts need to be fully reserved before converting (need equity contributions) In addition, the regulations of paid-up policies with guarantees need to be changed Paid-up policies can not expect to give excess return And will lose value compared to development in wages and inflation 18 Individual pension schemes The old system with individual pension agreements (IPA) ceased Source: Finance Norway Pillar 3 NOK thousand 19 Spurce: Folketrygdfondet, The Government Pension Fund Global is saving for future generations in Norway The fund's market value (June 1 st 2015): NOK billion The budgetary rule 4% of the fund value can be used in the national budget 156.2 billion kroner was transferred to the national budget in Government Pension Fund Global