As one of the government’s favoured methods of occupational pensions financing, the long-standing Pensionskasse arrangement has been given a huge boost by the Riester reforms. Between 20 and 40 new Pensionskassen are currently under construction or awaiting regulatory approval. These will swell the present total of 140.
The increase is more dramatic than it looks since more than half of the existing Pensionskassen are small. The new ones, on the other hand, which have been set up by the insurance companies to capture the pensions business of small and medium sized companies, are expected to become substantial players.
The Pensionskasse is an independent legal entity based on a life insurance type contract, and in most cases owned by the plan sponsor. It is regulated by the VAG insurance act and supervised by the BAFin regulator. Beneficiaries have a legal claim to their pensions and the Pensionskasse has clearly defined reporting guidelines and quantitative investment restrictions.
Before the implementation of the Riester reforms, 1999 figures from the ABA, Germany’s pension fund association, showed that Pensionskassen contracts accounted for around a fifth of the pensions assets of corporate pensions schemes. Book reserves dominated the market with 59%, direct insurance held 13% of company pensions money and support funds just 7%.
More worryingly, though, the figures showed a decline in the numbers of active members covered by Pensionskassen, which had dropped slightly from 2.41m to 2.38m.
The fall was attributed to the unfavourable tax aspects of the Pensionskassen, a stumbling block that was amended under the new Riester regime. Pensionskassen today stand to benefit more than any other type of plan from the pensions reform
This is principally because the Pensionskasse is the only one of Germany’s five types of occupational pension plans that can offer employees three pension options. The first option is the traditional system whereby employees – usually higher earners – are taxed at a flat rate of 20% up to a maximum if the tax is paid over by the employer. The second is the entirely new system for Pensionskassen whereby pension contributions are taken as an annuity. The third is the Riester product whereby employees can claim grants and tax deductions towards their savings provided they pay a minimum contribution.
Joachim Schwind, chairman of the board of the Pensionskasse der Mitarbeiter der Hoechst-Gruppe in Frankfurt/Main and deputy chairman of the board of the ABA in Heidelberg, believes the Pensionskasse will certainly be one of the vehicles of choice to deliver pension arrangements.
“This will especially be in the tariff agreements (between employers and social partners). Many industry branches are doing this. I think the Pensionskasse vehicle has proved itself to be very easy to handle with relatively little administration and very low costs, and also no contributions to the pensions benefit trust corporation and no risk for the employer.”
Schwind points up the major difference to the Pensionsfond: the fact that with the latter the employer bears the full investment risk.
“The Pensionsfond has full investment freedom, but the employer has to at least guarantee the nominal value of the fund, depending on what the contract looks like. Employers are worried a little bit about this.”
Despite the 40% equity investment restriction on Pensionskasse, Schwind explains that this can be higher in certain circumstances.
“The figure depends on the book value, and if you have some reserves you can actually put about 50% in shares through the Pensionskasse.”
To date detailed information on the take up of Pensionskassen is scant, although Schwind points out that several industry branches have decided to go exclusively down the Pensionskasse route: “Also, in any of the other branches like the metal workers it is one of the preferred pension options. There are no statistics yet though on how many companies have done either.”
Certainly, the Pensionskasse is proving to be a match for the Pensionsfond. Insurance companies appear to be setting up both products in equal numbers – conscious that the contribution rules under the social insurance changes are the same for both vehicles.
However, Schwind believes that employers seem to feel “much safer” under the Pensionskasse system.
“Most scheme arrangements are arranged through salary conversion and we will know by the end of the year how many people are really going to contribute. In February/March next year we should see what the participation rates are. It’s not really a question of how many companies have joined – it’s a question of how many employees are in the schemes.”
The Pensionskasse renaissance has already led to some interesting developments in the market.
Chemical giant Wacker-Chemie this year set up a special section within its long established Pensionskasse to offer the Riester plan, rather than join the new Pensionsfond, set up jointly by the unions and employers in the chemical industry.
The plan has been branded ‘PK ExtraPlus’ and the company says it expects the plan to be of interest to around 9,000 to 10,000 of the 15,000 German workforce.
Employees investing through the Wacker plan obtain an employer contribution as well as the state subsidy, and the company claims it is more efficient to invest through the company plan than an insurance company product.
The scheme starts in January 2003, and Wacker says its reasons for developing the Pensionskasse plus concept further were due to the minimal amount of change needed to convert its existing Pensionskasse.