For Germany’s new Pensionsfond occupational pensions vehicle, it may well be a case of second time lucky. Far from heralding a new age in liberal occupational pension investment when it was introduced at the start of the year, the new vehicle was shown to have design flaws.
Although touted as a major shift towards DC provision in Germany, observers noted that the capital guarantee requirements for the funds would hamper their ability to invest freely.
Furthermore, a government oversight on annuity restrictions meant the new funds looked less attractive for employees than existing occupational vehicles, where employees could take up to 20% of savings in a lump sum on retirement.
The government needed to move fast to restore confidence to a market where question-marks were hanging over both its second- and third-pillar reforms.
On 1 July this year, labour minister Walter Riester responded to his critics, amending both the rules on capital guarantees and lump sum/annuity arrangements. As Klaus Stiefermann, managing director of the ABA, Germany’s occupational pension fund association, explains: “The main changes in the law related to Pensionsfonds and will help them compete in the market and make them more flexible to use. Most of the other changes are minor.
“Firstly, to create a level playing field between the different occupational pension vehicles, the government has amended the law so that 20% of money saved in a pensionsfond may now be taken by employees as a lump sum. It is still necessary to have a lifelong income at the end though, which is important.”
Stiefermann says the change now makes it possible for direct competition and flexibility, in that employees can switch from a Pensionskasse to a Pensionsfond, or from a book reserve to a Pensionsfond without losing any pension rights. “Without this it would not have been possible to change the way of pension provision in Germany,” he adds.
The ABA chief says the reasons behind the annuities oversight involved both the aim of the legislation and the time frame in which it was drawn up. “The final goal of the legislation was to create a lifelong income for workers, but for the politicians the issue about lump sums was not an obvious one. The fact that the Pensionsfond reform was also finalised quickly in the period between Christmas and New Year last year meant that the reform came through on time, but that not all aspects had been thought through.”
On the issue of capital guarantee, Stiefermann says the main bone of contention concerned the fact that employers in effect had to guarantee twice an employee’s contributions. At the beginning of the year it became mandatory for employers offering occupational pensions to join Pensions Sicherungs Verein (PSV), a collective group offering insurance to cover members in the event of insolvency.
“The question concerned whether it was necessary that the pensionsfond gives the second capital guarantee, despite the knowledge that each guarantee has an influence on the investment of the funds.
“The change in law on 1 July means that the Pensionsfond is not obliged to give the second guarantee, because the actual very important guarantee is given by the employer. This makes it possible for the Pensionsfond to invest more liberally and gives them a better chance to compete in the market.”
Stiefermann believes that German employers, employees and consumer groups realise that occupational plans are very efficient and have been waiting for the reform so that they could realistically consider all the pension options available.
“There has been a time lag in some areas, which was caused by the fact that not all the legislation had gone through and there were not enough occupational pension funds up and running. We are still waiting for many Pensionsfunds and Pensionskassen to go onto the market. In some areas employers and unions say they want to decide which way to go on the basis of the broadest pension offering possible, so they are still waiting for Pensionsfonds to be in business”.
He says that another delay for the market has been the need for collective bargaining agreements in some sectors to approve deferred compensation plans. “Another reason was that other collective bargaining agreements were just looking at income pay, which was focusing the energy of employers’ associations and unions on collective bargaining instead of creating Pensionsfonds.”
However, Stiefermann also fears that information overkill on pensions could also lead to inertia in the pensions market for a few more months.
“If you look at some of the polls just taken, the feeling is that people don’t believe they have the right kind of information – even though the papers are full of it and the advertisements are everywhere. There really is a kind of information overkill at this time.
“Some politicians and journalists have a wrong idea of how these things work. If you look at the US and 401k plans, it took them about a decade to really take off and be successful. We are only talking about six months here!
“It takes time but I am very optimistic that in the second half of this year we will see many people moving towards occupational pensions.”
Just how successful is the new Pensionsfond vehicle likely to be?
Some observers suggest the new occupational funds still need a little fine-tuning. They argue that the reforms are a little stringent and that there needs to be greater freedom of choice between collective and individual pension fund systems, and between guaranteed products with lower returns and those without guarantees but with higher returns.
Nonetheless, the latest round of reforms to the Pensionsfond legislation has moved the vehicle in line with the directive on supplementary pensions from the European Commission, although it is regulated as an insurance product under Germany’s Versicherungsaufsichgesetz (VAG) regulations.
Again, some argue that the insurance regulation renders the funds costly to establish and insufficiently attractive compared to other products in the market. No doubt providers will have to be in for the long haul.
To start with, contributions will be small – 1% of gross salary this year, rising by 0.5% per year to reach the ceiling of 4% in 2008. Contributions up to e525 will be tax deductible, increasing by e525 every two years to a maximum of e2,100 in 2008.
The potential accumulation of assets, however, could be enormous, with inflows predicted to reach between e350bn and e550bn by 2008.
The unions will undoubtedly play a significant role in Pensionsfond development, encouraging both employers and employees to look carefully at the type of pension provision they arrange. The IG Metall pension plan is one that is putting the Pensionsfond at the core of its offering, and may point the way for other employment sectors (see page 32).