New defined contribution (DC) plans will strengthen funded pensions in Germany if they are widely accepted by employers and workers, according to Willis Towers Watson.
Talking to IPE, Thomas Jasper, head of occupational pensions at Willis Towers Watson for Western Europe, said the adoption of changes brought in under the Betriebsrentenstärkungsgesetz (BRSG) could change the country’s occupational pension landscape significantly. The law introducing DC plans will come into effect next year.
“If the new pension plans without guarantees get widely accepted, companies will have to set them up via funded vehicles,” Jasper said.
Direktzusagen pensions – in which benefits are paid directly from a company’s balance sheet rather than backed by financial assets – will in future only be allowed if employers grant a 0% guarantee.
At a recent conference the German supervisor BaFin called on companies and unions to get in touch about how to set up the new vehicles and plans.
However, Jasper pointed out it will take time for the first plans to be up and running: “We do not think any new vehicles will be set up before autumn 2018 by the social partners.”
This is largely because in the last quarter of each year, the so-called Tarifverträge (collective bargaining agreements), are negotiated between social partners of employers and workers’ unions. Only companies having signed on to these agreements will be allowed to set up pure DC plans under the new legal framework.
“It would be good if companies would be allowed to introduce these features on an individual basis in a works agreement, even if they are not part of a collective bargaining agreement,” Jasper noted.
Similarly, members can only be auto-enrolled into DC pension plans set up as part of a collective bargaining agreement.
Jasper said this limitation was “regrettable” but he added it was “very positive that auto-enrolment was mentioned in the law”.
According to a survey held by WTW among German employees last year, the vast majority (72%) said they would be content to be enrolled into a pension plan with the possibility to opt out.
The BRSG also requires employers to pass on any savings they make on social contributions by paying parts of the wages directly into pension plans.
Employers who have outsourced such deferred compensation plans (Entgeltumwandlung) to a Pensionskassse, Pensionsfonds or Direktversicherung vehicle will have to make a 15% contribution. This applies to new plans from 2019 and to all plans from 2022.
According to Willis Towers Watson’s Jasper, some companies were already passing on these savings via special arrangements, but he called on all companies to review their pension plans to check for any necessary changes.
“We expect this new legal requirement to create a new standard that would put pressure on all employers to pass on savings they make on social contributions when paying into pension plans rather than employees’ current accounts,” he said.
This would also mean employers that have set up the Entgeltumwandlung internally, including via book reserves, would have to make additional contributions to these plans.