Employer Action Code: Act
As part of recent occupational pension reforms, the Norwegian government has approved new legislation on employer-provided long-term disability (LTD) plans. The legislation was approved in May 2015 and proposed implementation guidelines are currently awaiting parliamentary approval. The changes would require that LTD benefits provided by employer-sponsored DB and DC pension plans be substantially amended, potentially as early as 2016.
The new legislation, which follows closely on changes to social security disability pensions that took effect in January 2015, includes a number of changes affecting benefit levels, taxation, and eligibility for state and employer-provided LTD benefits.
The changes require employer action and offer the opportunity for restructuring the risk, insurance premiums and P&L impact of both DB and DC employer-sponsored pension plans, with the potential for savings.
In January 2015, the social security LTD benefit was amended to be 66% of salary up to 6G (G refers to the Base Amount (Grunnbeløpet) which is currently NOK 90,068). Under the old law, the social security LTD benefit was 1G plus an earnings-related benefit covering earnings up to 12G. In effect, the social security LTD benefit has become more generous for lower earners and less generous for higher earners. However, the employee tax rate for LTD benefits has increased for both for state and employer-provided benefits.
Currently, Norwegian DB and DC pension plans often include an LTD benefit based on a DB-type formula, typically payable until age 67, targeting a total LTD benefit of 60 to 70% of salary up to 12G, with an offset for social security benefits. Under the new legislation, employer-provided LTD benefits would generally be limited to the following formula:
- 3% of salary up to 12G, plus
- 66% of salary from 6G to 12G, plus
- Supplement of 25% of G, limited to 6% of salary, plus
- Child supplement of 4% of salary up to 6G (per child)
The new maximum formula would therefore provide a total LTD benefit (social security plus employer) of approximately 70% to 75% of salary up to 12G, although with a higher tax rate for the member than the old formula. Market practice on the details of the new LTD design is still evolving — for example, whether or not to offer the “25% of G” supplement or child supplement.
In addition to the formula changes, employers will be encouraged to change the structure of their employer-sponsored disability pensions to remove any service-related accrual and to make the LTD benefits a pure risk insurance.
Survivor pensions in current DB and DC plans may be linked to the current level of LTD pension and, therefore, will need to be amended at the same time as the LTD formula.
Norwegian employers will be required to change their LTD benefit arrangements to comply with the new legislation, potentially as early as 2016. Many of these employers have already been contacted by their pension insurer in Norway to inform them of their options under the new LTD formulas. The changes would require employers to make a number of specific decisions and actions including:
- Design an effective date for the new LTD benefit formula
- Determine whether to remove service-related accruals to LTD benefits and transform them into a pure risk insurance
- Making appropriate changes to survivor benefits that reference the current LTD design
- Understand the cost/risk/P&L implications
- Implement an accounting treatment for the design changes
- Communicate plan changes to employees