GERMANY - Defined contribution pension plans are set to boom in Germany, according to international consultant Watson Wyatt.
The firm estimates that three-quarters of companies that currently offer a pension in Germany do so via a defined benefit scheme with the rest DC.
In the UK, by contrast, DC now accounts for 62% of coverage, with DB plummeting to 33% from 71% over the last eight years.
Marc Oliver Heine, senior consultant at Watson Wyatt's office in Munich, thinks DC could go the same way in Germany.
"We are often frequently contacted by companies which ask us: ‘We want to remove our pension risks, can we implement DC?'" Heine said. "I don't have any empirical data, but I would say that of all the firms which currently offer DB, 80-90% are thinking about implementing DC."
The Riester pension reforms of 2002 have also helped DC growth. Under the reforms, salaried employees got a legal right to contribute to a DC scheme that would either complement existing pension plans or serve as the initial one. Yet unlike the DC practised in the US, German employers guarantee all paid-in savings until they are withdrawn for retirement.
Moreover, leading pension experts stress that while DC is definitely an attractive option for German companies, they should be aware of its disadvantages.
"While (with DC) the investment risk is passed onto the employee, an employer in Germany may be confronted with new risks, namely those associated with choosing the right investment plans and giving employees adequate advice," said Klaus Stiefermann, managing director of German occupational pensions association aba.
Stiefermann's point was echoed by Boy-Jürgen Andresen, chief executive of German pensions consultant Heissmann, who said: "In the US, where DC dominates, there have been many cases of employees suing employers when their DC plans have failed to meet their expectations."
"In view of our experience with strict, employee-friendly German labour courts, there is a risk that a situation like that in the US could arise," Andresen, who is aba's current chairman, added.
Elsewhere, financial services provider OVB Holding this week saw its net income up 46% to €10.4m in the first half of 2006. Its German segment was mainly boosted by an increasing interest in the government-subsidised private pension "Riester-Rente".
"It is particularly pleasing to see our core market Germany gaining ground again", said execcutive board chairman Michael Frahnert.