Germany: A wish list
Nina Röhrbein asked the German pensions industry what it wants for the occupational pension sector
While actual pension reforms may feel a long way off in Germany, most people in the pensions and asset management sectors would like some improvements to the system.
“Any overhaul to the German system must strive to make it more straightforward and easier to understand,” says Oliver Bilal, head of distribution for Germany at Pioneer Investments. “Having five different occupational pension vehicles makes it extremely complicated and a nightmare for any human resources department to explain and incentivise their workers to take up what they have to offer. However, as insurance companies naturally have a big stake in such discussions, a meaningful simplification will not gain traction without their support.”
“Because of the expectations resting on the companies, we would like to see more intensive support and promotion of occupational pensions from a tax, social insurance and legal perspective,” says Thomas Jasper, head of retirement solutions at Towers Watson Germany. “One example is to raise the annual limit of contributions for active employees to over 4% of salary in the Pensionsfonds, another is to allow lump-sum payments as pension benefits.”
Bernhard Holwegler, head of pension consulting in global solutions at Allianz Global Investors in Frankfurt, says: “Opting out is one way to widen and strengthen occupational pensions and make them more efficient.”
The BVI also believes that opt-out models or auto-enrolment in labour agreements are a good idea.
“Entitlements from the second pillar make up on average only around 6% of retirement benefits, which is too low,” says Thomas Richter, CEO of the BVI investment fund association. “The other issue is the uneven distribution among employees. Employees in large companies currently dominate occupational pensions but the smaller the company, the lower the participation rate. Among mid-sized companies, the level of participation sometimes only stands at 30-40%, which is insufficient.”
But opinion is divided on the five vehicles and Stefan Oecking, partner at Mercer in Germany, believes the five legal structures are appropriate. “However, the entire pensions landscape in Germany is tax-driven and we believe that easier tax rules would benefit the employers and pension funds,” he says.
“If these tax rules are simplified, the volume that can be allocated to external pension funds would increase and this in turn would help reassess the current structure of our pension vehicles. Expert knowledge is required to differentiate between direct insurance, Pensionskasse and Pensionsfonds, which could be simplified.”
At the end of 2010, the direct pension promise – book reserves – had invested assets of €256.5bn, making up over half of the €482.9bn occupational pension assets in Germany, according to the association of occupational pensions AbA. The Pensionsfonds meanwhile only had 10% of those assets with €25.6bn, making up 5.3% of the overall pension landscape. Pensionskassen made up 23.4% of the overall volume, with €113bn at the end of 2010.
“It is important to bear these figures in mind when people are discussing reforms through, for example, the Pensionsfonds,” says Jörg Ambrosius, CEO of State Street Bank in Munich.
“Most of the assets are still company-owned or based on past pension reserves, which have over the last years been gradually funded through contractual trust arrangement,” says Bilal.
“But a huge funding gap remains, which puts a lot of stress on the sponsor of the scheme. We would welcome anything that brings more clarity for new schemes, in other word, a simpler toolkit or pension scheme universe with two or three plans rather than five. This would increase the attractiveness of pension schemes. For past and existing plans a stronger incentive for companies to even fund their existing pensions would help, meaning tax advantages for corporates would be beneficial to increase the funding level and hence the stability of German occupational pensions.”
Bilal would like one insurance-type methodology, as well as a plan with full freedom and choice of investments and asset allocation.
According to Tim Hoffert, director at the consultancy Feri, all five vehicles have established themselves and are justified. “They all have their advantages and disadvantages and offer the employer plenty of choice,” he says. “They have also accumulated significant volumes of assets by now and employers and employees have adapted to these structures.”
One problem though, he admits, is that switching between pension vehicles affects tax advantages.
Simpler and more transparent vehicles which do not compromise their individual advantages would therefore be a good idea, believes Jasper.
Peter König, managing director at the German Society of Investment Professional DVFA, would like to see a simplification of the pension system, with “a €10,000 tax-free allowance for pension savings” instead of a different tax agreement for each of the five occupational pensions vehicles and the two-third pillar vehicles. He believes the complexity of the vehicles and their different taxation is detrimental to the pension participation rate.
“The German pension system is definitely over-engineered,” says Thomas Huth, director of pension solutions at DB Advisors.
“As so much of the German system is insurance, the overall size of the pension market is much smaller and fragmented than, for example, in the Netherlands or the UK. Insurance coverage funds (Deckungsstock) are in fact invested alongside pensions. But insurance products have been particularly strong over the last five to six years, in contrast to the weakness of the fund-linked products. However, with insurers struggling to meet their guaranteed returns in the current low-interest rate environment, this may change now.”
Many of the things Deutsche Asset & Wealth Management would like to change are beyond the realms of the German government as they come from the EU, such as Solvency II, Basel II and the European market infrastructure regulation (EMIR).
“We would love a reduction of this red tape, however, this is not on the agenda and it is quite clear that these days it is more and not less regulation,” says Huth.
“We would also like to see some movement by the regulator to allow a broader universe of corporate bonds to base the discount rate on because German defined benefit plans struggle with the extremely volatile discount rates.”
But Hoffert warns: “For employers and employees a simplification of the pension system may be desired, however, a simplification would also lose some of the vehicles’ advantages. At least because of the pension insolvency scheme PSV, pensioners have not suffered a substantial loss in the past decade.”
König is also concerned with the large number of small pension funds in Germany that may not be able to deal with the administrative burden resulting from Solvency II.
“Should Solvency II be implemented, they either need to consolidate or find a common service provider,” he says.