The Bundesrat upper house of the German parliament has rejected the social democratic-led government’s plans for second and third pillar pension reform.
Germany’s Bundestag, the lower parliament chamber gave the go ahead for the reform in January, pledging tax-advantaged status to third pillar life insurance and mutual fund products and ratifying the creation of a new pensionfond second pillar vehicle.
The somewhat expected move by the Bundesrat comes down in part to the fact that the Christian Democrat party (CDU), the largest opposition body, has a majority in the upper house of the parliament, but not in the lower house.
Nevertheless, the government’s plans have met with criticism in Germany, mostly because of the angle they take on pension fund investment.
Under the new law, the proposed additional occupational retirement vehicle the ‘Pensionfond’ would be placed under insurance regulation.
“The idea of pension funds is superb, but the regulations are contradictory to the development: asset funding is closer to the capital management law than the one on insurance supervision,” says Horst Ludwig; managing director of Frankfurt-am-Main based Pension & Compensation Consulting.
“You can argue that it shouldn’t be like this, but then again, why don’t we see how it works and then adjust it. You have to start somewhere, and certainly, if you start from scratch you can always say that you could have done things better or in a different way,” Ludwig adds.
The proposed second and third pillar pension reform in Germany has been designed to counterbalance the reduction of the state retirement system, which will see the replacement rate of salary progressively decrease from around 70% to a 67% level by 2030.
A mediation committee, consisting of members of both the lower and upper houses, will meet shortly to discuss amendments and changes to the proposals.
The law is expected to be ratified – albeit in a modified fashion - in the coming months.
In another significant move the German government has said it will create a new regulatory body, which will supervise retirement vehicles – set to comprise the current insurance regulator the BAV, the banking regulator BAKred and the Bundesbank - although it has yet to elaborate on how the new body will operate.
Investment companies seeking to manage third pillar assets will be marked off against a checklist of 12 regulatory points.
Dirk Popielas, executive director and head of the pensions services group for Goldman Sachs in Frankfurt, comments: “As long as you meet these criteria then you can get the tax approval to set up an EET arrangement for the fund (Exempt, Exempt, Taxed) where only the benefits are taxed.”

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