GERMANY - Finance experts fear there could be negative effects from a move by the German government to ensure money transferred to pension funds, as part of a person's salary, will remain exempt from social tax indefinitely.

A government bill has now been passed the German parliament to meet such promises, however, criticism for the extension of the current legislation has surfaced from the opposition parties Greens and Liberals as well as tax experts.

More specifically, independent pensions expert Winfried Schmähl said the exemption granted in 2001, to strengthen the second pillar pension provision, should not be granted indefinitely as long-term effects of doing so are still not known.

He added the tax loss resulting from it has to be paid by all employees, including those who do not have the opportunity to convert parts of their salary into pension fund contributions.

That said, union representatives and the association of occupational pension funds (VFPK) said the final confirmation of the promise made by labour minister Franz Müntefering earlier this year was "a good day for German occupational pensions". [See also earlier IPE-coverage: Germany shows support for deferred compensation scheme]

"Companies will continue to be able to provide attractive occupational pensions for employees in the lower and middle salary tiers," commented Peter Hadasch, chairman of the board at the VFPK.

Scrapping the tax exemption would have led to a decline in the size of the second pillar, Martina Perreng, expert for labour law at the German union federation DGB, explained.

She added some employees might even have considered ending existing contracts which would have lost them and the pension industry lots of money.

The number of occupational pension contracts had declined last year when the government considered to end the tax exemption in 2008, as planned.

If you have any comments you would like to add to this or any other story, contact Barbara Ottawa on +44 (0)20 7261 4618 or email