Here’s what you should know about a contractual early retirement pension (AFP)

Contractual early retirement pension (AFP) was originally an early retirement plan in both the private and public sectors that applied to people who stopped working before the normal retirement age of 67. Also, strict rules made it unprofitable for people to work while collecting AFP benefits. The passing of pension reforms has made it possible from 2011 and onwards to make flexible withdrawals from your National Insurance Scheme retirement pension when you turn 62. It’s also become possible for you to combine retirement pension withdrawals and working without having your pension reduced. So-called ‘neutral withdrawal rules’ mean that earlier withdrawals lead to a lower annual pension. The pension system’s new design has made it possible to have individual freedom of choice without increasing costs for the government. At the same time, however, so-called ‘life expectancy adjustments’ have started transferring the cost of steadily increasing life expectancy rates from the government to pensioners in the form of lower annual pension benefits at a given age of withdrawal.

One of the pension reform’s most important goals was to increase worker incentives by rewarding them financially for working longer. Conversely, AFP caused the opposite effect through its making early retirement easier. Because flexible retirement pensions and early retirement pensions didn’t mix well, discussions started on making changes to the AFP plan.

In 2011, various forms of AFP in both the private and public sector were introduced. In the private sector, AFP was changed from a lifelong compensatory allowance to a National Insurance Scheme retirement pension (“old-age pension”) with flexible withdrawals starting at age 62. In the public sector, AFP continued to be an early retirement plan for people retiring before age 67, offering them penalty-free withdrawals starting at age 62.

Then, in 2018, the parties in the public sector agreed to change both employer-based pensions and AFP for people born after 1962. There was general agreement that the new AFP plan in the public sector would be designed in the same way as AFP in the private sector. In other words, it would be a lifelong surcharge to a National Insurance Scheme retirement pension, offering a flexible withdrawal age and life expectancy adjustment. (However, the rules for a new AFP plan in the public sector have as of today still not been finalized.)

It’s important to note that AFP is a collectively bargained pension benefit; yet not everyone’s covered by an AFP plan. And even if you’re covered, there’s no guarantee that you’ll have the right to collect it. This is because there are AFP qualification requirements in both the private and public sectors. The government provides financing and sets conditions for the private sector’s financial contribution to this plan.

Currently, employees can be divided into different groups with respect to AFP coverage and AFP plans. There are a lot of employees in the private sector who work for companies that aren’t covered by this collective agreement and so don’t have AFP. Around 58 percent of private sector employees weren’t covered by the plan in 2016^[1]  . Employees at companies with the collective agreement that provides AFP can qualify for a pension if certain conditions are met. Public sector employees with a public service pension (employees in the state, municipalities, healthcare, etc.) who were born before 1963 only have access to AFP as an early retirement plan. For public sector employees born after 1962, while there are no regulations currently in place, an agreement has been reached on an AFP plan modeled on the private sector plan.

Switching jobs can impact both your right to receive AFP and the AFP plan awarded to you; so this is an important factor to consider if you’re thinking about looking for a new job. And even if you don’t switch jobs, your employer can pick up or drop AFP if the conditions surrounding the collectively bargained coverage change.

In the private sector, the underlying agreement signed by Tekna and NHO authorizes AFP in organizations. If a company has a collective agreement that includes AFP, all employees at this company are covered. However, it’s important to note that a collective agreement must be validated for all workplaces in a company in order for these workplaces to be covered.

[1] Based on calculations made by NAV and referenced in Evaluation of AFP in the Private Sector, 7 December 2017.

If you qualify for AFP, benefits are calculated based on your income amount and your registered pensionable income in the National Insurance Scheme. Income that’s up to 7.1 times the average basic amount (G) and earned up to age 62 is included. The average basic amount is adjusted annually and goes into effect on 1 May, corresponding to national average salary growth changes over time. The average basic amount on 1 May 2021 was NOK 106,399, which established an earnings limit of approximately NOK 755,000.

Let’s look at an example: A Tekna member working in the private sector who was born in 1955 will turn 67 in 2022, so qualifies to collect AFP. Based on Tekna’s salary statistics, we can roughly calculate that their salary during the 30 years they worked from age 32-61 was at least 7.1 G. Before this time, we assume that they earned 6 years of salary equaling 5.5 G (6 years of a starting salary for a recent Master-level graduate). In this case the earnings basis equals 246 G (30 x 7.1 + 6 x 5.5).

With an earnings percentage that is 3.14 and the current average basic amount, this turns into an annual pension of NOK 76,954 after a life expectancy adjustment (246 x 0.00314 x 106399 / 1.068^[2] ). A so-called ‘compensatory allowance’ of NOK 16,211 is added to this figure, making the total AFP sum NOK 93,165, a life-long annual payment that may be collected starting at age 67.

This compensatory allowance to AFP is being gradually phased out for people born in 1963, who receive no compensatory allowance benefit. This will reduce the benefits compared with current pension levels. While AFP may be collected from age 62, your annual pension will be higher if you postpone collecting it until you turn 70. So the amount of your AFP benefits (if you qualify) depends on your amount of earnings, age of withdrawal and date of birth.

If you’re wondering how AFP applies to you according to current rules, you don’t have to calculate this information manually. Instead, NAV has a service called «Your pension» that gives you an up-to-date overview of your pension earnings in the National Insurance Scheme. You can also calculate your future retirement pension in the National Insurance Scheme based on your actual earnings and expectations of future earnings. In addition, you can get a calculation of what your AFP benefits will be within these same parameters.
NAV pension (in Norwegian)

[2] AFP is life expectancy adjusted using ratios. The ratio is 1,068 for people born in 1955 and who are age 67.

AFP has conditions that have caused some people who are approaching retirement age to lose out on getting AFP. There are two sets of conditions, one set relating to the day you turn 62 and one set relating to when you withdraw AFP. If the conditions connected with turning 62 aren’t met, you’ll never collect AFP according to current rules. If the conditions connected with when you withdraw AFP aren’t met, you’ll have to delay your withdrawal until these conditions are met later on (if they’re met at all).

The main point of the first condition is that your main job must be in an AFP company for at least 7 out of the last 9 years before you turned 62. This means that the qualification period starts at age 53 and that the highest age to be eligible for coverage is 55. In addition, you can normally not receive benefits from your job without having a corresponding work obligation during the last 3 years before you turn 62. However, there are a few exceptions to this rule, f.ex. a severance package can be within the regulations if its annual value is less than 1.5 G.

At the time you withdraw AFP, you must be employed and actually working in an AFP company. There’s also a requirement that you’ve been continuously covered by the plan over the last 3 years before starting to make withdrawals.

There are also rules pertaining to other benefits. People age 62 and older who are receiving a disability pension aren’t allowed to collect AFP.

Its unique conditions mean that AFP can’t be compared with either a National Insurance Scheme pension or an employer-based pension. This is because a pension from your employer is secure; you keep the rights to collect it even if you quit your job.

These conditions also create a risk that you could lose AFP after age 62 if you don’t apply for AFP in time. It’s probably for this reason that many people have started withdrawing AFP as early as possible. Please note that applying to withdraw AFP in the private sector without applying to withdraw your National Insurance Scheme retirement pension at the same time isn’t allowed. However, it’s possible to stop payments of your National Insurance Scheme pension after withdrawal by setting the withdrawal rate to zero.

It’s first and foremost LO and NHO that decide if any changes will be made to AFP. There’s currently a report out detailing a possible reform of AFP in the private sector. If the plan’s changed as outlined in this report, this’ll have a relatively quick effect on both determining who qualifies for AFP and how large their pension will be.

Losing AFP because of a failure to meet its qualifications is an important reason why an evaluation’s being done whether to change AFP in the private sector. Many people have lost AFP while getting close to retirement, f.ex. as a consequence of downsizing and/or receiving a severance package that’s too large. The changes pointed out in the report mostly involve replacing current qualification rules with making benefits dependent on how long someone’s been covered by AFP. In this case, many more people will qualify for AFP; at the same time, the performance level could possibly vary a lot more from person to person.

More concretely, a proposal’s been made to have a long transitional period where current calculation rules are being phased out at the same time that new calculation rules are being phased in. There’s disagreement about the level of earning rates. Reorganizing AFP will probably be a topic brought up during wage settlement meetings between NHO and LO in 2022.

According to the report’s proposal, you’ll have to have worked at an AFP company starting in 2015 and continuously up to age 62 in order to get full credit for any income earned before 2015. Any earnings after 2015 will be based on your employment salary.

The existence of AFP qualification rules in the private sector probably initiated an agreement being made for starting a new AFP plan in the public sector patterned after the one found in the private sector. Having joint qualification rules and more or less equal pension levels in the AFP plans was intended to remove the barriers stopping employees from moving between public and private sector organizations with AFP.

The fact that this agreement hasn’t been followed up in the form of concrete rules must be seen in connection with the fact that changes might be made to the private sector’s plan in the future. If the private sector moves away from the qualification rules that apply to it today and over to a calculation based on time worked in AFP companies, the argument for having joint qualification rules is weakened. However, there’s been agreement on what the financing for a new AFP in the public sector will look like; this makes people feel uneasy when this agreement isn’t followed up. Yet as of today, people who were born in 1963 will turn 62 in 2025; at this point, they should be able to collect life-long AFP in the public sector.

The most important thing is to figure out your own situation and get an overview of the possible consequences for AFP if you’re thinking about getting a new job.

For example, if you were born in 1963 and work in the public sector, you should, in accordance with the agreement, normally qualify for AFP at the same level as a private sector AFP. If you start working in the private sector, you won’t get AFP according to current rules. Yet if changes do end up coming soon to the private sector, while you might still be able to receive a private sector AFP, you’ll probably receive a much lower amount.

If you’re younger than 55, you’re able to aim at receiving both a private and public sector AFP. Yet making a sudden job change can affect both plans negatively given the current unresolved situation. If the AFP plan does end up being changed in the private sector, but kept as is in the public sector, the public sector will most likely pay out a higher amount.

If you’re over 55 and working in an AFP company in the private sector, it’s important to stay in an AFP company until you turn 62 and up to the point when you start making withdrawals. If the private plan does end up being changed in accordance with the abovementioned report, your amount could be lower than what they are according to current earning rules.

If you’re over 62 and in a position to be able to collect AFP, it’s important to follow along and apply for AFP in time in case changes are made that could impact your right to collect it. There are also good reasons to follow along to see if any other changes are made to AFP rules. It’s always possible that a number of people will end up in a situation where making a withdrawal before a certain date will give them AFP according to current rules, while later withdrawals might give them AFP according to new and different rules.

There’s no reason to believe that new rules will yield higher AFP amounts in the private sector. However, there are some people who’ll be able to collect AFP according to new rules who don’t qualify for AFP according to current ones.