Germany’s lumbering pensions system is in the process of reform. A series of measures that involve amendments to some 19 laws are being implemented to improve and modernise pension provision in Germany.
As part of the reform, which is still chugging its way along the legislative tracks, employees win the legal right to defer pay up to 4% of the social security ceiling, to be contributed pre-tax to an occupational pension scheme.
The reform has left Germany’s core mittelstand, or mid-sized, companies in the position of having to provide some type of pension schemes for their employees, or at least the organisational framework for them to do so. Many companies already do this, but others are struggling to find a solution that is both workable and does not carry prohibitively expensive administration costs.
Hamburg-based Holsten Brauerei, for example, with a workforce of 3,000, already provides its own occupational pension scheme. And Binding Brauerei, based in Frankfurt am Main, has recently pooled pension provision from all its subsidiaries into one incorporated scheme – Binding Pension. The purpose of the new company was to keep pensions entirely separate from the individual operating businesses, says Binding spokesman Stefan Leppin.
The Riester rules on pensions took effect at the beginning of this year. Under the new rules, three months after an employee has lodged a request to convert salary to pension, his or her employer has to offer a scheme whereby this can be done. The ultimate deadline for compliance is the end of the 2002 fiscal year.
Pensions consultants say that in practice, mittelstand companies are likely to choose between the two feasible options – either they will provide access for their employees to a direct insurance contract, or they will join an industry-wide scheme.
“A lot of the time, they would already have direct insurance contracts… In most cases they would be offered on a salary sacrifice basis,” says Sabine Mahnert, vice president at Morgan Stanley’s European pensions group. In principle, German companies see occupational pension provision as positive, but the time constraints the new laws create are in many cases seen as a problem.
”The new reforms around deferred compensation are an opportunity for all employers in Germany to help their employees,” says Alan Botterill of Towers Perrin in London. “However, mittelstand companies faced with need to do something quickly, may see the reforms more of a burden and may adopt a short-term solution that may pose some real challenges for the future.
”Within mittelstand companies, there is normally little pensions expertise and there is a real challenge in making an effective decision about how best to meet the need to provide the facility for employees,” he says.
Botterill agrees that direct insurance appears to be the default option, as the simplest ‘off the shelf’ means to provide a pension scheme for workers.
Insurance giants such as Allianz, Gerling, Hannoversche Leben and others have already set up pensionsfonds. These, says Mahnert, are basically organised multi-employer funds which mid-sized companies can buy into.
Schemes that encompass an entire industry sector are in the process of being set up, and these are another option for mittelstand companies keen to avoid the burden of running their own separate scheme. Eight such funds have already been established. They are run jointly by the relevant trade union and employers’ association.
The most visible of these new sectoral pension schemes is the one in the large metalworking sector, which includes around 4m workers. Here a scheme has been set up in conjunction with union IG Metall. The scheme – Metall-Fonds – was given official approval in May by the Federal Financial Services Supervisory Authority (see page 32).
IG Metall says that, so far, more than 100 companies have declared their intention to sign up for the scheme. But although big companies such as Daimler-Chrysler, Ford, Opel and MAN are set to join, many employers in the sector have held back. IG Metall says these firms are waiting to see if any of their employees apply for the scheme, in which case they will be obliged to provide a pension.
However, these industry-wide pensions are a choice that is only open for those mittelstand companies operating within the sectors that have collective bargaining agreements between trade unions and employers.
Trades unions have a strong influence within major industries in Germany, even within the mittelstand, says Botterill. “In many industries, the trades unions have developed solutions that encompass all three options that qualify for state subsidy – these are being introduced to collective bargaining agreements, allowing employees to choose.
“For mittelstand companies this introduces complexity, where they have little expertise, especially if a Pensionsfond approach is selected as this has some capital guarantees on investment that puts some investment risk with the employer,” he says.

The laws surrounding pensions and taxation are complex, says Mahnert. It is impossible to fund an adequate corporate pension under just one tax regime, she says, so setting up an efficient corporate pension scheme is a process of optimising the regimes that exist.
“Large companies can do that better,” she says. “It is just not feasible for small companies to go down that route, so they would choose the joint ones.”
Whichever approach is adopted, the administration burden is high, says Botterill, and hence relatively expensive for mittelstand companies, compared with the very large companies with established, dedicated infrastructure to support company pension provision.
“The adminstration issues may become more complex and therefore there is considerable uncertainty over how onerous this issue may become,” he says.
But for now, elements of the reform package are still in flux. The measures are still being challenged in the German legislative process. This makes it difficult for mittlestand companies to take decisions on pensions provision.
“There are so many different models right now,” said Leppin of Binding Brauerei. “And our unions are still working on pensions provision for our workers. People are unsure about the legislation – it’s not a done deal.”
In practice, the Riester requirements, even with the state subsidy, may make Riester provision less effective that simple tax-free deferred compensation up to the limit of 4% of the social security ceiling, which is now allowed, says Botterill.
There are dangers, he says. “Due to lack of expertise or use of independent guidance, mittlestand companies run the risk of selecting a solution that may not be the most effective for staff in the medium to long term. This may become an issue in the future if they have to change approach to be fully competitive as employers.”
Tax is not the only obstacle faced by mid-sized companies in Germany in their attempt to comply with the Riester reform requirements. Most will have difficulty financing the administrative side of an in-house pension scheme. Unlike their larger counterparts, they do not have the information technology infrastructure in place to manage their own pension schemes.
“Many companies are trying to persuade employees that they should get a pensions arrangement on a private basis,” says Rolf Misterek, benefits consultant at Mercer Human Resource Consulting in Frankfurt. This method of pension provision puts much less of an administrative burden on mid-sized companies, he says, but is still a legitimate option.
One way of persuading employees to join a private scheme is to offer a discount on the contributions.
Many companies do not view the Riester reforms as having any real advantages for smaller companies, says Misterek. The tax breaks make these third-pillar pensions only advantageous for employees who have several children, he says.
“From a current perspective, there are other arrangements which would provide higher advantages for employees than Riester,” he says. Some companies would prefer to go down these alternative routes, he says.
While companies generally acknowledge the fact that decent pension provision can be a solid employee benefit that helps attract and retain staff, the new requirements are simply not attractive to most employees, he says. “So for the mittelstand, it’s simply not worth having these arrangements in place.”
“For larger companies, it’s more possible to offer all types of pension. They are in a better position to handle the administrative burden and the costs involved,” Misterek says.