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Draft of German pension reform proposes plans without guarantees

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A copy of a highly anticipated draft of a new law aiming to “strengthen occupational pensions” in Germany (“Betriebsrentenstärkungsgesetz”) is in the public domain.

For several months now, experts in Germany have debated leaked bits and pieces of reform proposals.

A draft of the proposed law dated 25 October is available on a social policy portal (in German) run by Johannes Steffen, social policy expert and adviser. 

With the new law, the government wants to lay the groundwork for industry-wide pension plans with more flexible pension promises.

Studies commissioned by the government had shown that many employers were shying away from offering pension plans because of the long-term liabilities and the required top-up payment for guarantees. 

The introduction of “pure contribution-based pension plans” (“reine Beitragszusage”), as the draft law puts it, aims to “provide full cost and planning certainty for employers” with regards to their pension liabilities.

In the discussions prior to the publication of the draft, the term “defined ambition” had often been used, or “Zielrente” (target pension) in German.

However, the draft now uses “pure defined contribution” as a term.

At a recent conference in Vienna, Heribert Karch, chairman of the German pension fund association aba, said: “We do not need defined contribution systems in Germany, which the people do not want anyway if we have defined ambition, or Zielrente, as we call it.”

However, he generally agreed with the need to relax strict guarantees for occupational pension plans.

“It will still need a lot of debate, but it is clear we need more flexibility in our pension promises in Germany,” he said. 

“In the current low-interest-rate environment, you have to go into assets that were formerly called risky assets. To do so, you have to be able to make use of the long-term investment horizons over which you can easily digest crises and drawdowns.

“Therefore, we need to re-phrase hard guarantees into softer ones. And this also allows for a pension promise to remain a promise.”

The government argues in its draft of the proposed law, which will now go into the consultation phase, that the introduction of defined contribution plans will “sustainably strengthen the role of the social partners”.

Employer and employee representatives will now have to help operate these new pension plans, it said.

The industry-wide pension plans can be set up either in new industry pension funds or within the framework of existing Pensionskassen, Pensionsfonds or Direktversicherungen (i.e. insurance-based pension funds).

The new law would require several existing legal frameworks to be amended.

Among other things, the government wants to create “legal certainty” for opting-out models, which, at the moment, can only be negotiated at an employer’s own risk.

The government also noted it was aware that a mandatory occupational pension system or a general opting-out model would have helped increase the number of participants in the second pillar.

However, it argued that such models would have been “more invasive” for companies and workers.

The voluntary models are, therefore, to be promoted instead.

Apart from making pension promises more flexible, the government also wants to introduce pension subsidies for lower-income workers.

As part of the amendments to the second-pillar pension laws, the threshold for tax-free contributions an employer can make to a pension fund will also be adjusted.

If the draft is approved by all stakeholders and parliament in time, the new law is scheduled to take effect from 2018.

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