Germans may opt for hybrid plans
German employees may be able to force employers to implement hybrid DB/DC pension plans under legislation to be ratified this spring, says Klaus Stieferman, managing director of the Heidelberg-based ABA pensions association.
Stieferman says the German government is looking at the introduction of ‘contribution orientated benefit plans’ – in short – defined employee contribution plans of at least 4% of salary, which will have an employer guaranteed benefit.
These will be made available by companies on an obligatory basis for all employees. Workers will have to negotiate though with employers over which of the four possible German pension structures is used, he says.
“ We are not going into defined contribution plans, but there is a stipulation of how much money an employee has to put in. This amount will then be managed via a life insurance framework to decide on the benefit,” adds Stieferman.
Stieferman adds that if employers and employees do not agree on a product then the assets will go into a life insurance type pensions contract.
Current discussion he says, centres around how the ministry of finance will support the proposals.
“The problem here is taxation, whether we will have something like a deduction of taxable income or whether we will go into a system where tax is paid at the end.”
Germany’s Unterstuzungskassen second pillar support funds could also enjoy a liberalisation of investment rules under the proposals.
Norbert Rössler, managing director at consultant Buck Heissmann says the German ministry of finance is examining ways of clarifying the tax status for support funds as well as allowing them investment freedom, provided they adhere to actuarial principles. “The government is looking at legislation which would make the support funds very close to the Anglo-Saxon pension fund.”
At present the financing of Unterstutzungskassen is limited due to tax reasons, and few are managed according to actuarial principles.
“This only occurs if the fund takes out a reinsurance policy, but then the investments of a reinsurance company are, of course, subject to strict legal investment rules limiting equity content to 30%, amongst others. This is not a very effective, aggressive investment policy,” Rössler says.
“The main change is that they will probably permit that outside of reinsurance contracts support funds can be financed according to actuarial rules.”
Rössler believes the proposals would bring Germany’s support funds into line with the direction of the European Commission on supplementary pension funds.
“It is a system which is already in place as a separate legal entity.
“The only obstacle to its success in the past has been that it cannot be financed according to actuarial rules. If this obstacle is removed then we can follow prudent man rules and do almost everything.”