In 2002 Germany introduced its first major pension reform under the pressure of demographic and fiscal developments. The ratio of employees to pensioners is 4:1, but it will change to 2:1 in 2050 and it was clear that the PAYG pension system would have to undergo a dramatic change during the following years. I don’t think anyone in Germany under the age of 40 believes that they can rely solely on the state pension in their retirement, so they will have to massively save on their own.
The reform grants every employee the right to defer up to around 8% of an average income into a pension plan and requires employers to offer deferred compensation at their company.
Deutsche Telekom (DT) had already given its employees the option of a voluntary deferred compensation based on a contribution-orientated benefits commitment. Introduced in 1997, it was structured on the direct commitment principle, or the book-reserve method, whereby a pension commitment appears directly on the balance sheet of the company in the form of liability.
Deferred compensation is seen as part of the total compensation at DT and such an offer helps to present DT as an attractive employer, especially in light of the ageing of the population.
We feel that braving the reality of this issue and encouraging younger people to rethink their attitude is part of DT’s responsibility as an employer.
The reform requires that companies run their schemes via external funding methods. Our existing system was by internal funding, so we had to present an external link.
The reform also introduced a new form of commitment, a contribution commitment with minimum benefit, which means that the employer is only required to commit to contributions. The capital sum, and therefore the investment risk, remains with the employee. Only in the unlikely event of capital destruction across the entire timeframe is the employer required to guarantee the sum of total contributions.
So the reform allows a company to offer deferred compensation while limiting its own risk, especially capital investment risk, almost completely. So it is possible for the company to accept future responsibility since its economic interests are now taken into account.
But why did DT opt for its own pension fund, the Telekom Pensionsfonds a.G. (TPF), rather than making use of an already existing external pension fund or saving in the already existing pension savings accounts?
I think there are essentially four
q The pension fund was attracted by the flexible opportunity for deferred compensation;
q With its eligible workforce of around 100,000 Deutsche Telekom is just large enough to be able to introduce such a scheme. The TPF is used exclusively by DT employees. That allows simple channels of administration since there is virtually no distance between the employer and the TPF, and the people who manage the TPF are DT employees. For example, I work exclusively for TPF but my contract is with DT. But in legal terms the TPF is an independent mutual organisation, not a company within the Telekom group;
q Opting for a separate pension fund enables us to influence capital investment risk and decisions. There is still some capital investment risk associated with the minimum benefit so having direct access to investment decisions means being in control of their risk – at least as far as possible. This element of control is not easily realised in an external institution where DT would be just one customer;
q The best way for DT to present its social responsibility to an employee is via an in-house institution, which in turn delivers a direct positive effect on the workforce’s image of the company.
So how is the pension fund structured? There are three phases. On the contribution side there are two contribution sources, the cross-deferred compensation, called an Eichel pension, and a deferred-compensation Riester pension, both named after German ministers at the time of the reform. Contributions are withheld from a participating employee’s salary by the employer and transferred to the pension fund. There the contribution is split according to the employee’s wishes, the breakdown being chosen by the employee within certain limits. For example, an employee may asked to defer e1,200 a year, broken down as e900 to build up the old age pension, e100 to protect his dependants and e200 as disability insurance. The
relevant amounts are invested in the capital market and in an insurance
At the heart of the pension fund there is the capital investment and the additional insurances offered. The capital investment is done via a segregated fund. This process is outsourced to an external partner, HSBC Trinkhaus & Burkhardt. This segregated fund is created and managed especially for the Telekom pension fund, but we determine the capital allocation. The employee’s allocated shares remain in this fund until the employee reaches the age of 55 or 60, when his shares in the segregated fund are re-allocated into a deferred pension insurance policy. This mechanism is intended to help prevent the employee from losing the bulk of his saved assets due to unforeseen circumstances, such as a stock market crash, at the last minute before the pension kicks in.
The third element - when after years of saving the accrued benefits are paid out to the former employee or his/her dependants - is probably the most important from the employee’s point of view. This period of pension payment is covered by another external partner, Munich Re’s subsidiary Victoria. In this way we transfer the risk of longevity from our fund to our partner via reinsurance.
In addition to the old age pension we also offer protection from the financial consequences of disability and death through flexible insurance policies. Our model gives employees the option of modifying their risk insurance each year, enabling them to fit protection to personal need, unlike most insurance policies currently on the German market. We are able to implement this model with the aid of technically annual insurance policies where the policy is calculated for one year but then extended automatically if the employee’s requirements remain the same. The employee decides the insurance contribution and the benefit is then dependant on the employee’s age and gender. A very broad group of employees are eligible for the insurance because of our simplified health question. The maximum insurance benefits is a e1,200 monthly disability payment and a e150,000 lump sum on death. Our disability insurance has proven very popular and is the secret star of our portfolio. One-third of employees participating in the pension fund have opted for this form of additional protection. And here too we have joined forces with experts, Swiss Life in the field of disability and Allianz for life assurance.
I have often referred to the partners who assume our risks, but would like to make clear that the employee has only one point of contact. We, as the Telekom Pension Fund, provide the relevant services. In all cases, the employee is insured and protected via and in the pension fund.
We use a wide range of activities to market the pension fund as an attractive way of reducing a pension shortfall.
What happens over the forthcoming months and years in Germany? In our view the steps that need to be taken include a substantial strengthening of company pension schemes, encompassing getting rid of bureaucratic regulations and strengthening pension institutions.
Currently, we are strictly a German pension fund restricted to DT workers in Germany. But given the opportunities presented by the EU pension fund directive of 2003 this may not always be the case and it is conceivable that we use the pension fund beyond national borders. However, in this respect we are only just beginning to consider the possibilities.

This text is the address on the establishment of Deutsche Telekom’s deferred-compensation company pension scheme given by Klaus Fiedler, an actuary of the Telekom-Pensionsfonds a.G., to the Pensions Landscape and Encouraging Pension Funds in the CEE conference held in Prague