German Reforms: A brave new world
Just before Christmas, the only real opposition to the German government’s second-pillar reform draft came from the insurance sector. Not publically, mind you. In a statement, it “welcomed the reform in principle”. The insurance association GDV only mildly criticised plans to end guarantees in the industry-wide pension plans to be created.
People in the pensions industry were nonetheless concerned, fearing the powerful insurance lobby would begin to throw its weight around. Guarantees have been a part of the German second pillar since the start more than a century ago. But they are also hurting the domestic pension industry in the current environment.
Initially, the idea to create a new second-pillar pension vehicle in Germany came from the pension industry and companies. In 2014, one of the few already existing industry-wide occupational pension plans, MetallRente, proposed the creation of schemes to be set up by the social partners. These plans, called Tarifparteien in Germany, include both employer and employee representatives. They negotiate minimum wages and other employment standards for various industries.
MetallRente, the pension plan for the metal industry, was quite surprised when the government included the idea in its reform proposal.
For another part of the reform draft, an initiative by the industrial group Bosch – or rather, its former head of pensions Bernhard Wiesner – served as a blueprint. Given the low-interest-rate environment, the company struggled to meet the guarantees it had to grant people in their retirement phase, even within a non-insurance-based vehicle such as a Pensionsfonds. After almost a year of activism, Wiesner managed to get the law changed – and now non-insurance-based Pensionsfonds can offer pension payouts without guarantees. This means more risk can be taken in the asset allocation. The legal changes became known as Lex Bosch.
When social minister Andrea Nahles first presented her idea of a new industry-wide pension vehicle in 2014, there was considerable criticism. This initial draft was rejected mainly because the pension provider still had to offer certain guarantees. Other critics said the new vehicles would add even more complexity to a system already considered one of Europe’s most complicated.
In 2015, the plans were put on hold for more than a year. The social ministry (BMAS) argued that other reforms – such as the implementation of the EU’s Portability Directive or amendments to the tax regime – had to be made a priority. In any case, the time was used for a general overhaul of the reform proposal.
In the autumn of 2016, the government presented a new version of the draft for new second-pillar vehicles. Nahles, rather than simply adding a short paragraph to article §17 in the law governing occupational pensions (BetrAVG), now presented a completely new law, the Betriebsrentenstärkungsgesetz, or the “law strengthening occupational pensions”.
The proposal avoids mention of all guarantees in order to make it more attractive for companies to set up pension plans and easier for pension providers to generate returns. It also contains various other features, such as opting-out models and tax incentives for setting up pension plans for lower earners or at SMEs.
In principle, all stakeholders have welcomed the proposal. Of course, each group has called for amendments and changes, such as additional tax incentives, a choice of guarantees or the inclusion of companies outside collective-bargaining agreements (Tarifpläne). It remains to be seen which stakeholders will get what they want.
But the real question – which can only be answered once the law is implemented – is whether the model is communicated well enough for German workers to accept a brave new world with opting-out models and no guarantees.