Norwegian Financial Supervisory Authority clarifies buffer fund allocation and surplus treatment including 20% profit share on paid-up policy drawdowns

The Norwegian Financial Supervisory Authority has issued a supervisory letter setting out its interpretation of key questions on the treatment of buffer funds, relevant for most life insurance undertakings and pension funds. The letter addresses how buffer funds must be allocated to contracts, how buffer-fund reductions affect surplus sharing for paid-up policies in the payout phase, and how buffer-fund-related returns should be distributed for occupational pension schemes. On allocation, the authority emphasises that the undertaking’s buffer fund must be distributed to individual contracts even where the underlying assets are managed collectively, and that transfers between customers’ or contracts’ buffer funds are not permitted. For paid-up policies in the payout phase, it concludes that reductions of the buffer fund, including use under the Life Insurance Regulation section 5-4, are treated as return that can form the basis for surplus sharing, meaning the undertaking may retain up to 20% of the total investment-return surplus including released buffer-fund amounts, with the remainder used as a single premium to increase benefits. For occupational pension schemes under the Occupational Pensions Act, it treats buffer-fund drawdowns allocated to a contract as return for that contract and applies the general distribution rule in section 8-5, implying such surplus should be credited to the premium fund rather than the pensioners’ surplus fund, which is limited to surplus on premium reserves for pensions in payment. The letter reflects prior discussion of legal clarity around surplus sharing on buffer-fund drawdowns, where the Ministry of Finance has indicated it may consider making the rules more explicit.