PENSION, CONTRIBUTION LEVEL

28 Feb PENSION, CONTRIBUTION LEVEL

Many companies are in a process to reassess contribution rates as a result of changes of the rules for defined contribution pensions from 1st January 2014. The questions most companies ask are: What are my competitors doing? What is normal? What are my employees’ expectations? What are the costs?

These are all relevant questions, but the most important task may be assessing what income level is natural or desirable for employees to have on retirement. There are a number of issues at play here, but two elements of particular importance:

  1. Whether your company is covered by the state contractual pension scheme, AFP
  2. The employees’ general salary levels

We have calculated pension levels with different contribution alternatives under two different assumptions on salary levels.

The calculations in Figure 1 show the anticipated pension level at age 67 for a typical high-salary employee. We took as a starting point someone with a higher education who works from age 25 to 67, with real salary growth corresponding to what is normal for an engineer or economist.

Figure 2 shows a similar analysis for an employee on an ordinary salary who starts working at age 20 and who has real salary growth that corresponds to a skilled worker in Norwegian industry.

If you want an employee to retire with a pension level of 66 %, and your company has normal salaries and is included in the AFP scheme, a pension contribution between 4 and 5 % of the employee’s salary should be sufficient. If we are talking about a company with mostly high-salaried employees that are not included in the AFP scheme, one should set contribution rates at about 6 % for salaries up to 7.1 G and 19 % of salaries between 7.1 and 12 G (G = public pension base amount in Norway).

We recommend our clients to analyse the company’s employee structure to get a picture of the pension levels that the different rates will give, before deciding on contribution levels. Such an analysis is also a good tool for demonstrating to employees the value of a pension plan.

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