The benefit structure used for Chemie Pensionsfonds, Germany’s first fund under the new fifth way of providing pensions, was intentionally kept as simple as possible. The brochure presented to employees of companies opting for the plan, explains the emerging pensions gap for those expecting 67% replacement income from their social security pension, the reducing disability income and the right all employees have to have part of their salary deducted and applied to a pension arrangement.
Having direct deduction to provide for pension provides income tax relief and up to 2008, social security relief. Doing this through the scheme has the benefits of lower costs, more favourable terms for investment, and “no agent’s fees at all”.
If the employee decides to contribute the annual basic amount laid down in the collective wage agreement of E478.57, the employer provides the industry agreed subsidy of E134.98. But should the employee contribute more, a subsidy of E13 is paid on every E100 of addition contribution to the scheme.
The scheme guarantees the amount of contributions that are paid in to age 65 will be available for pension less deductions for biometric risks – these are invested on a ‘prudent person’ basis as with life insurance, the brochure points out. The second element is described as ‘free investment to increase return’, where some of the contributions are invested on capital markets around the world, with the best investment managers in the market being selected.
If the member wants higher disability cover, a choice is given of 5% or 10% of contributions can be allocated to this.
At retirement, the fund is paid as a pension which is guaranteed for life. But if interest rates after the retirement date are higher than calculated, these extra amounts are converted into pension increments. Therefore each year, the pension for the following year comprises the minimum guaranteed pension amount, plus the extra income interest converted into monthly pension entitlement. This process starts over gain every year.