Germany: Wanted: a simpler, stronger second pillar system
The German second pillar appears to have taken a backseat in discussions about reforming the country’s pension system, finds Nina Röhrbein
From a bird’s-eye perspective, German occupational pensions may look overwhelming. But for the moment, there is no clear signal that reform will soon take place to address these complexities.
“There have not been any serious debates on changes to the bAV since the occupational pension fund law [BetrAVG] of 2002,” says Thomas Richter, CEO of the BVI, the German investment fund association.
The law added a fifth occupational pension vehicle, the Pensionsfonds, to the existing direct pension promise (Direktzusage), direct insurance, support fund (Unterstützungskasse) and Pensionskasse.
“In 2012, ideas emerged to potentially reform the system, although the main ones concerned the first and third pillars, circumnavigating occupational pensions,” Richter says. “The second pillar will only become relevant if the parties take a position ahead of or after the parliamentary elections in September.”
Last year, the opposition Social Democratic Party (SPD) suggested improving second pillar pensions through auto-enrolment.
“They suggested creating auto-enrolment pension plans, starting with a contribution of 2% of salary and offering to increase the level of contributions to a reasonably higher percentage of salary, such as 6%,” says Stefan Oecking, partner at Mercer in Germany.
“This would make a lot of sense, perhaps on a step-by-step basis, and it has to be accompanied by tax and, where appropriate, social security advantages. But the coalition government, composed of Christian Democrats, CDU and CSU, and Free Democrats (FDP), has not advanced those ideas. Pension funds would like to see higher contributions but the idea does not enjoy consensus within the industry and within politics,” Oecking says.
Auto-enrolment would force companies to offer a pension plan if they are not currently doing so. At present, all employees in Germany have the right to a deferred compensation scheme but, particularly in small and mid-sized companies, they do not insist on it.
“There is a fair chance that auto-enrolment will happen within the next four years, simply because occupational pensions are widely believed to be more efficient than the private Riester and Rürup pensions,” says Thomas Huth, responsible for pensions solutions at Deutsche Asset & Wealth Management.
Another idea, that self-employed workers covered by professional pension funds – the so-called Versorgungswerke – should make mandatory contributions to the first pillar in order to avoid burdening social systems with funding gaps, has already been rejected.
“There has already been a push for exceptions, for example, that any person older than 50 years, and anybody earning less than €450 per month should be excluded,” says Oliver Bilal, head of distribution for Germany at Pioneer Investments.
“There might also be an opening clause for anyone who is in a specific occupational group that opts to be excluded. These exceptions would soften any mandatory clause.”
An additional supplementary pension, the Zuschussrente, or Lebensleistungsrente, for those with small, state pensions, such as part-time workers or carers, was meant to come into force in 2012 but has been postponed. Another idea, the Kombirente, designed to facilitate more flexible working in older age, has also been discussed.
“For these a feasibility study was commissioned in autumn 2012, but the results have yet to be published,” says Jörg Ambrosius, CEO of State Street Bank in Munich.
The SPD is again questioning the new retirement age of 67, which is being phased in gradually. The party is looking for exceptions, such as people who have worked for more than 45 years.
“The leader of the opposition, Sigmar Gabriel, prefers occupational over private pensions,” notes Huth. “This may have some implications if the SPD wins the election.”
In the past, when the state pension was amended, the third pillar and private Riester and Rürup pensions were strongly promoted. “Today, it is recognised that in terms of efficiency and participation, the targets for private pensions have not been reached, which is why politicians are now looking to the occupational pensions for a solution to the pension problem in Germany,” says Thomas Jasper, head of retirement solutions at Towers Watson Germany.
Expectations are high, and a Towers Watson survey of employees has found that the under-30s view occupational pensions as the most important building block of the pension system. The German media has recently reported on problems of the Riester pension, alleging that its state subsidies only benefit the insurers, not pensioners.
“There is a large variety of Riester products on offer,” says Tim Hoffert, director at consultancy Feri. “Pensioners should carefully check the relevant terms and conditions with their advisers.”
A new law for private Riester and Rürup pensions, the Altersvorsorge-Verbesserungsgesetz, has been drafted.
The impending Solvency II directive is meanwhile dominating discussions about second-pillar pensions.
“Solvency II will change the regulatory law for insurers, thereby affecting Pensionskassen, direct insurance and Pensionsfonds,” notes Hoffert.
“Non-insurance linked forms of occupational pensions will only be impacted indirectly. But this would be a problem, as they have none of the net assets Solvency II requires. Small and midium-sized insurers may also struggle with the administrative burden of Solvency II.”
But if new legislation leads to increased reporting requirements, they will need to hire more staff, which in turn will make occupational pensions more expensive.
According to Hoffert, it is important to strike a fair balance between over-regulation and the necessary risk management.
Pooling now easier
As a result of the Kapitalanlagegesetz (KAGB), the new investment law implementing the Alternative Investment Fund Managers Directive (AIFM) into German legislation, and set to come into force on 22 July 2013, pension pooling will be made easier.
The law has led to the creation of a tax-transparent cross-border vehicle, the Investment-Kommanditgesellschaft (Investment KG).
“In the past, under German investment law, there was no tax-efficient investment vehicle for pension pooling,” says Hoffert. “Now we have the Investment KG to facilitate pension pooling, which is transparent for tax purposes.”
Market insiders do not expect any additional costs from the regulation to be passed on to investors in such funds.
“However, offering the wrapper is one thing,” says Huth. “Just as important is ensuring that the tax transparency is accepted by the different fiscal authorities abroad. We are still significantly lagging the international market.”