Commerzbank sent shockwaves across the German labour market in January when it announced that it was cancelling the agreement over company pensions. The move unleashed protests from workers, and the bank’s public image suffered. Subsequent statements from the bank made clear that it was not – as had been thought by some – doing away with pensions altogether, but opening up negotiations to change the terms of the existing pension scheme.
The implications were far narrower than some feared – for most Commerzbank staff, the pension scheme in question only constituted around a quarter of the total occupational pension, the bank said.
The management board said “serious business management reasons” were behind the decision to freeze the pensions arrangement from the end of 2004. “Pension obligations must be such that they can be planned for in the medium- and long-term,” the board said.
Under the existing agreement, cuts in the Germany pension system - both those that would come in the future and those already announced - would have had to be made up in full by the bank to the tune of tens or hundreds of million euros. Avoiding this was in the interests of future generations at the bank, it said.
By the middle of February, a new pensions agreement was reached. Under the new model, the bank no longer has to make up for cuts in state pensions; and instead of three different variants of company pension, there is now just one. The bank’s staff is to receive a certain percentage of their salary, the precise level of which is yet to be set. Before that level has been set, Commerzbank can’t say exactly how much it will save. However the bank’s works council has assured that under the new pensions model, staff will receive significantly more than 80% of the pension they would have received under the old.
During the process of change, Commerzbank admits that mistakes were made in the way the whole thing was handled. “The problem is that we did it very badly… informing the staff but not telling the works council. We misjudged it,” says Commerzbank’s Peter Pietsch.
Commerzbank is far from alone in having to bite the bullet over unaffordable occupational pensions arrangements, Pietsch admits. “I think that there are considerable risks inherent in the German system.” Most of corporate Germany will have to make similar changes to their corporate pension schemes in time, he says. “The only question is when.”
Problems exist with other corporate schemes, the precise nature of which depends on the particular rules governing each scheme. At Commerzbank, the pension payout was based on the net final salary of each employee, giving a pension of about 80% of this figure. However, it was impossible to forecast exactly what the final salary would be in net terms because of the other factors affecting it. These factors importantly included tax, the level of which is entirely out of the control of the sponsoring company.
“So the bank had a lot of risks dependant on external factors. It would have been possible to meet the payments this year and the next, but after that, who knows?” says Pietsch.
Under the new arrangement, employees will receive a pension paid exclusively by the bank - but one that is calculable, he says. Pietsch points out that the old pension arrangement, which dates from an agreement made in 1994, was very generous in comparison with most other company schemes in Germany. “The situation is exactly the same for many other companies, and they will have to make this change,” he says.
Others agree that Commerzbank is not alone. The Gerling-Konzern has taken similar steps. “This is the case with many businesses,” says Ulrich Hombrecher, economist at WestLB. “Pensions arrangements cannot be continued as they were.” But how, in the future, other companies - overburdened by their pension liabilities and the risks involved - will decide to solve the problem depends on their individual situation.
Exercise in Cost Cutting
Corporate Germany is not just battling with the burden of pensions, but with the whole raft of costs associated with the wage bill. Firms have had to reduce their fixed costs, says Hombrecher. Attempts must be made to tie staff compensation to the general financial fortunes of the company.
One way in which companies are altering their pension arrangements is moving towards ‘salary conversion’ – whereby a part of the salary is converted into pension savings, and invested in funds. The advantage for the employee comes in the favourable investment terms that the company – as a bulk buyer - is able to get.
But others say the Commerzbank pensions debacle was, in many ways, atypical of what is happening in the industry. Of the three pension pillars in place in Germany, the corporate one is the strongest, says Guido Hoymann, analyst at Bank Metzler in Frankfurt.
Corporations are having to make decisions, however, about how these products should be structured in the future – whether they should be on a defined benefit or defined contribution basis, for example. “That has to be optimised so it remains affordable for the company,” he says.
The scheme which Commerzbank renegotiated was a final salary scheme, but in the end, the replacement scheme was also on the same basis – only some of the burden was reduced. The affair is a reminder of just how strong worker representation is within the corporate structure in Germany, with works council members holding positions on the supervisory board, says Hoymann.
Employers are tending to modernise their corporate pension schemes, but will certainly not be abolishing them. They are important in attracting staff, he says.
“I think it was a special situation with Commerzbank. They have been in trouble profitability-wise,” he says. And there was a political dimension to the bank’s move, he says. Chief executive Klaus-Peter Müeller is an active member of the opposition CDU. It was important to him to send out a signal that things have to change in Germany and everyone is a part of that, says Hoymann.
He was reacting against the over-regulated labour market in Germany that makes changes difficult to get through. The move was an attempt to find any way of making savings, and to shift rewards towards those that are performance-related. “It doesn’t make sense to reward people for staying with a company regardless of what they achieve,” says
But in the end, little change was brought about. Müeller only saw one side of the political picture. “Müeller’s basic idea was to change this technocratic way, and to incentivise people… but he didn’t take into consideration the strong reaction of the employees,” he says.