The case in summary • Free policies give hundreds of thousands of Norwegians a guaranteed, but low return, which means that the pension becomes less valuable every year.• Over half of the free policies cannot be moved, even if the owners want to.• NOK 445 billion is invested in over 1 million such free policies, with a guaranteed interest rate that is, on average, far below a good bank interest rate.• The free policies lose purchasing power every year and do not follow the growth in consumer prices.• Only the 440,000 free policies held by DNB can be converted into free policies with investment options.• A During the month of June, a government-appointed working group will come up with proposals for changes to the regulations for free police officers. The summary is made by an AI service from OpenAi. The content is quality-assured by news’s journalists before publication Fripoliser. Earned pension rights that will become part of the pension sometime in the future. Behind the sleep-inducing name, however, something important hides – savings for a pension that will provide future payments as a pensioner. From earned guaranteed pension rights (see fact box). NOK 445 billion which is placed in over 1 million such free policies (see fact box). They have a guaranteed interest rate which, on average, is far below a good bank interest rate. How do the free policies work? Free policies are pensions you are entitled to. It is the pension you have earned from a current or former employer when you leave a defined benefit pension scheme. It is therefore pension savings that you carry with you further into your working life. In such a scheme, your pension is a guaranteed sum from the employer, which forms part of your final salary. The employer pays for this guaranteed pension, but the price is reduced by the expected return (guaranteed return). The free policy also gives you a guaranteed return every year. A free policy ensures that you retain the rights to the money your employer has already saved for you, even if you leave your job before you reach retirement age. After the free policy is established, no more money is paid in by the employer. The money is managed by a pension company which invests it to get a return. To ensure the guaranteed return, most of the money is invested in interest-bearing securities that give a low but safe return. A small portion is invested in shares. When you reach retirement age, you will be paid the money from the free policy as an annual pension. At the end of 2023, there were a total of 1,033,662 free policies in Norway, of which 999,390 were ordinary free policies (without investment options). Only 34,000, a little over 3 per cent, had been converted into free policies with investment choices, which the owner himself can decide how to invest. The total value of the free policies was NOK 365 billion in the life insurance companies and NOK 69 billion in the pension funds. That is to say. a total of NOK 435 billion. As of now, only DNB offers to convert free policies into free policies with investment options. Sparebank 1, Gjensidige, Nordea and Storebrand do not. Storebrand previously offered this product, but has moved away from it. The company informs news that it is working on a technical solution for the conversion of free policies. Source: Finans Norge/Finanstilsynet/DNB/Storebrand/Nordea/Gjensidige Many people probably don’t even know that they have a free policy. Once a year you get an account statement in the online bank or post office – which is difficult to understand. The guaranteed return is on average over 3 per cent, and only with a higher return can the pension payments be larger in the future. The problem is that the money is invested in products that usually give a weak return. If only the guarantee is achieved, the payments are on hold. If excess returns occur, part of the money will be set aside for a buffer fund with the managers. Among other things, this will cover the guarantee even in bad years in the market. Those who read the printouts with a magnifying glass over many years will see that the amount of the annual guaranteed pension paid hardly moves upwards over time. In the last 10 years, prices in society have risen by 35 per cent, according to the price calculator of Statistics Norway (SSB). The free policies therefore run the risk of losing purchasing power every year. Both Finans Norge and the Pensioners’ Association claim that the free policies lose purchasing power every year because future payments do not keep pace with wage and price growth in society. Over the past five years, purchasing power has fallen by NOK 51 billion, or 14.9 per cent, according to the Pensioners’ Association. In practice, pension savings have almost become a zero guarantee. Guarantee for a bad pension? In 2020, prices in society increased by only 1.3 per cent, according to Statistics Norway. Even then, it does not appear that the guaranteed annual payment from the free policies managed to keep up with the general price increase, two specific examples that news has looked at show. The guarantee is worth little and almost a guarantee of getting a bad pension, many in the industry believe. – It has been very difficult to manage free policies in the customers’ interest. The regulations are an important reason for this, says Tone Meldalen, who is director of pensions at Finans Norge. – The free policy seconds have lost a lot of purchasing power for many years, says Tone Meldalen, professional director at Finans Norge. Photo: Johan B. Sættem / news As a general rule, the money must have a guaranteed annual return. To ensure the guaranteed return, most of the money is invested in interest-bearing securities that give a low but safe return. A small portion is invested in shares. You can read more about this below. Finanstilsynet is concerned that vested rights have very strong legal protection in Norway. They point out that the guarantee of an annual return has been interpreted strictly to ensure that the future pension payment is not weakened, and refer to section 97 of the Constitution. – It is in the nature of the matter that it must be strict for people to give up that right, says Runa Kristiane Sæther, who is section manager for insurance supervision at the Norwegian Financial Supervisory Authority. The inspection indicates that there is a built-in conflict of interest between the companies and the free policy owners, which means that it is not easy to change the regulations without further ado. – We are happy that the problem surrounding free polices is being addressed. Because it is an important topic, says Runa Kristiane Sæther, section manager for insurance supervision at the Norwegian Financial Supervisory Authority. Photo: Johan B. Sættem / news Almost 600,000 free policies are “locked in”. The regulations allow you to waive the guarantee – and choose how the money is to be invested yourself. The free policy is then converted into a free policy with investment options. The customer then takes the risk himself – and decides how the money is to be invested. Much like a defined contribution pension in the private sector. But. Only the 440,000 free policies held by DNB can be converted. The other companies will have nothing more to do with free policies than they have to. The reason is, among other things, a very convoluted and complicated set of regulations. Storebrand, Gjensidige and Nordea do not offer to convert free policies into products with investment options. Storebrand used to do it, but has stopped doing it. By the end of 2023, NOK 21 billion had been invested in free policies with investment options. That is just under 5 percent of the total capital. – Those who have free policies who are in their 50s or younger are welcome to have a counseling session to look at the likelihood that they will come out better when choosing investments, says Stian Revheim, product specialist at DNB. Photo: Stig B. Fiksdal In DNB, the customers who have actively chosen to waive the guarantee have profited well for the past 10 years. Assuming they have invested the free policy with investment choices in a broad global portfolio, says product specialist Stian Revheim. – The return has been positive every year, and at least twice as high as the guaranteed one every single year. And in some years up to three to four times what you get on a guaranteed free policy, he says. The reason is a much higher proportion of shares in the pension savings. At the same time, a significant devaluation of the krone in the last decade has contributed to the return, as much of the money is invested abroad. Free policies with a guarantee are almost exclusively invested in interest If the customer has not actively given up the guarantee, the money will in practice be almost exclusively invested in interest-bearing securities and some property. In addition, the money is invested in a vanishingly small share, around 10 per cent. In practice, the pension companies have to invest the money with a very high proportion of interest-bearing securities, and little in shares. It is necessary if the companies are to be sure that they can fulfill the interest guarantee, which in principle must be fulfilled every year. Without taking too much risk themselves, which could mean that in the worst case they have to eat away at their own equity in order to fulfill the interest guarantee. The paradox is that this way of putting together the portfolio is close to the opposite of what would normally be the financial recommendation for long-term savings. Normally, the typical recommendation would be a relatively high proportion of shares when saving with a time horizon of more than 10 years. As is the case for many owners of free policies in their 50s with many years left until retirement age. From the new year, new rules came into effect regarding buffer funds, which should give companies an incentive to take somewhat higher risks in management. If management goes into the red, it is the buffer that breaks first. Only DNB offers investment choices Even though DNB is the only company that offers investment choices, it is still not the case that customers are queuing up to request advice on the product. – In relation to how many agreements we have, quite a few are interested in it, says Stian Revheim. – When you think long-term with your own money, you must be aware that some years may be negative, but that the total long-term return will be positive. But unfortunately you don’t have that option for collective free polices, he says. – Historically, has it always been profitable to switch to investment choices, given that you have, for example, 15 years left until retirement age? – Yes, and given that you place your money with a broad global exposure, so be it, says Revheim. Changes may be on the way The Government has appointed a working group which, during the month of June, will come up with proposals for changes to the regulations for free policies. The working group consists of representatives of the authorities and the parties in working life. – There may be proposals that can improve the situation and that can be agreed upon. But we know that it will be challenging, says Runa Kristiane Sæther in Finanstilsynet. The authority says that it will only propose or support proposals that it is certain will benefit customers. Published 24.06.2024, at 06.05
ttn-69
