Legal changes give new German pension funds parity

GERMANY- Germany's new pensionfonds will finally receive parity with other occupational savings vehicles at the beginning of next month when members are allowed to opt for the first to take some of their pension in a lump sum at retirement. Pensionfonds will in addition enjoy greater freedom to invest following the decision to drop compulsory guarantees as of next month.

Until now, members of pensionfonds were going to be obliged to turn their savings into an annuity on retirement. Changes that should come into force in July will enable those retiring to take up to 20% of their savings in cash.

The ABA, Germany's occupational pension fund association, has welcomed the changes, which need approval from the upper house next Friday. “This new legislation is on the right track and the changes will make the pension funds more attractive that they used to be,” says managing director Klaus Stiefermann.

“All four other vehicles for occupational pensions were able, not only to pay an annuity at the end, but also to pay up to 20% in cash and a guaranteed monthly payment that can be turned into an annuity. This was very flexible but the new pension fund did not have this option and so we lacked a level playing field.”

The change also makes the various occupational schemes more compatible and easier for Germans to switch between.

Other changes coming in next month will allow the funds greater freedom in their investment following the decision to drop the guarantees they are obliged to offer employers. Until recently, employment law specified that the new funds were responsible for the guarantee; now employers can shoulder the responsibility.

At the beginning of the year it became mandatory for those offering occupational pensions to join Pensions Sicherungs Verein, a collective group offering insurance to cover members in the event of insolvency.

Says Stiefermann: “the question was then, if you have a system like this, is it still necessary for a pension fund to have to give a guarantee of a certain payment?

“With the pensionfond system, the employer has to become a member of the Pensions Sicherungs Verein which means that, if the fund is not able to pay the money it is supposed to, so the employer has to step in.

“Now, If the employer is going bankrupt, Pensions Sicherungs Verein pays. We said that a construction like this means it is not necessary for the pensionfond to give its very own guarantee. Since it’s always the employer taking care of the problem, the pension fund should be as free to invest as possible.”

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