The German parliament (Bundestag) has given the go-ahead for reform of the country’s pension system - passing legislation on Friday (Jan 26) giving tax advantaged status to third pillar life insurance and mutual fund products and ratifying the creation of the new ‘pensionfond’ second pillar vehicle.
The approval for private funded pension provision is set 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.
And 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.”
However, concerns that these reforms would not go far enough to meet Germany’s future demographic deficits prompted the government to pass legislation for the new ‘pensionfond’ second pillar occupational plan.
Popielas adds: “Everyone was happy to hear the government come up with a DC solution to the pension law. Of course there is still some kind of principal guarantee with this, but nevertheless it is being introduced and the principal guarantee is focused on the retirement age.”
And he believes the reform could lead to a sea change in company funding of pensions in Germany – particularly as the legislation appears in tune with many of the recent proposals set out in the European Commission’s draft directive on supplementary pensions:
“ On a tax neutral basis a company can now transfer its book reserve into a pension fund.
“ We would obviously like to see a pure DC scheme, but this is a nice way forward and what is really interesting to see is that pension funds will not now be over regulated by quantitative restrictions as suggested in the draft directive of the Commission where the talk is of prudent man and qualitative restrictions. This is a big move forward for Germany.”
However, he notes that Germany’s investment banking community has been somewhat piqued by the inclusion of pensionfonds under insurance regulations.
“ Putting it under the insurance law means that technical provisions will have to be made as they would for a life insurance company.
“This is over regulation. As it is defined at the moment it is not an Anglo-Saxon type pension fund but an insurance product with more investment freedom.
Popielas believes Germany’s powerful insurance lobby may have influenced the debate, but says the asset managers are looking to claw back lost ground: “What we are doing at the moment is fighting for the same vehicle as the insurance industry under our KAGG law – and we want this to be regulated, not by the insurance industry, but by our own banking regulator.
“ For the second pillar in Germany there is no level playing and in the banking industry we are fighting to get this back.”
However, Popielas is upbeat about what the law will do for Germany’s capital markets: “I’m still very bullish because even if the insurance companies get the clients, at the end of the day they will invest the assets into the capital markets – but this time with more investment freedom so we will see a strong move from bonds towards equities.
“ On the other side though we in the asset management industry here would like to have direct access to the clients as well.”
The new legislation will pass to the Bundesrat (Germany’s second chamber for the country’s Länder) on February 16.
“ There is a strong likelihood that in the first instance the Bundesrat will say no to this, but it is not in their interest to reject the whole thing.
“ They are just fighting to get better feedback from central government, “ comments Popielas.
On February 22 the first meeting of the mediation committee between Germany’s lower and upper houses will take place, where amendments are likely to be discussed over one or two meetings before the Bundesrat is expected to pass the legislation.