Occupational pension plans in Germany are mainly financed by building up pensions liabilities in the company through the book reserve system.
The external financing vehicles are insurance policies and two types of pensions funds: the Pensionskasse and the Unterstützungskasse (support fund).
Currently, three new approaches for external pensions funding are being discussed: Pensions-Sondervermogen (PSV), Euro-Pensionskasse and Pensionsfonds-Unterstützungs-kasse. None of these concepts has yet been legalised.
The Federation of Investment Banks in Germany (Bundesverband Deutscher Investment-Gesellschaf-ten - BVI) has created the PSV as a special type of investment fund for pension provision purposes. Its main characteristics are as follows:
- the assets will mainly consist of equities and open property funds (at least 50%);
- the equity proportion can vary between 30.1% and 80%; therefore, if the equity proportion falls to 30.1%, the fund has to be at least 20% invested in property;
- derivative instruments can only be used for portfolio insurance purposes, with the proportion of options limited to a maximum of 10% of all assets;
- up to 10% of the assets can be invested in venture capital;
- investment in foreign currencies must not exceed 30% of assets.
The BVI supports the implementation of the PSV funds as a new kind of admissible investment fund under the special legislation governing investment funds. But they are not pensions funds in the usual sense. As a sub-portfolio of an investment bank, they are not independent institutions or trusts; a PSV fund gives no protection against the insurance risks of pensions plans; and the contributions are not tax-deductible for the employer.
PSV funds could be used by companies for the external investment of accumulated pensions liabilities. But, compared to the existing investment funds that can be used for pensions purposes, PSV funds do not offer major advantages. The main characteristic is the combination of equity and property investment within a single fund and prescribed minimum proportions for these asset classes.
The Association of German Life Assurance Companies (Verband der Lebenversicherungsunternehmen), bases its model on the existing Pensionskasse. A Pensionskasse can be regarded as a special insurance company for pension products, which is strictly regulated by the German insurance supervisory law regarding funding method and valuation of assets and liabilities.
Pensionskasse is tax-exempt and contributions are tax-deductible for the employer if certain conditions are satisfied. The employee has to pay income tax on the contributions, but only a proportion of the benefits is taxed. The main characteristic of the Euro-PK is that contributions should not attract income tax for the employee, whereas the benefits of a retiree should be treated fully as income. The Euro-PK would have to meet all the heavy investment restrictions under the insurance law.
The Unterstützungskasse (UK) already has some of the characteristics of an adequate pension fund. It is an independent entity, the fund is tax-exempt, the contributions are tax-deductible for the employer and are not regarded as taxable income to the employee, if certain conditions are fulfilled. In addition, there are practically no restrictions on the investments of a UK and an insolvency protection system exists. However, the funding of a UK is restricted by regulations in the tax law, which lead to a modified terminal funding method and to an economically insufficient funding level.
The German Federation for Occupational Retirement Provision (Arbeitsgemeinschaft Betriebliche Altersversorgung - ABA) has based its model on the UK, calling it Pensionsfonds Unterstützungskasse (PUK). The main difference is that the financing of a PUK would be based on an actuarial funding method, allowing an economically adequate financing of benefits. PUKs can also be used for financing defined contribution plans, without actuarially guaranteed benefits like a minimum rate of return.
In my opinion, the PUK is the most sophisticated approach to a new type of pension fund, with interesting opportunities for both the investment and insurance industry. The Euro-PK is not so attractive because of the investment restrictions. PSV funds offer little to occupational pensions schemes compared with existing investment fund types, but they could be of benefit for individual retirement provision at the third pillar level.”
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