Headwinds and tailwinds
Germany’s latest pension reform comes at a time when Brussels and EIOPA are presenting unwelcome challenges
• Germany’s BRSG reform allows for the expansion of occupational pensions and is the most extensive recent reform
• Social partners may set up collective DC plans, although none have yet done so
• Aba is critical of the proposed scope of EIOPA’s future activity and of the EC’s PEPP proposal
Germany’s Occupational Pensions Reinforcement Law (BRSG) came into force in January this year. The most extensive reform of occupational pensions in recent decades, it received parliamentary approval in July 2017 after more than three years of intense debate. Supported by ministries, academics, aba and the social partners, policy makers were looking for a way to increase coverage of company pension schemes, particularly in small and medium-sized companies and for low-income earners.
Faced with declining benefit levels from the statutory pension system from the 1990s onwards, the previous coalition government came to the conclusion that it is simply insufficient for only one in two companies to offer occupational pensions and only around 60% of employees to be entitled to an additional occupational pension.
Pay-off again for low earners
Employers who pay additional occupational pension contributions for employees with a gross monthly income of up to €2,200 (in full-time or part-time) are eligible for a 30% tax rebate. To qualify, the employer’s contributions must range between €240 and €480 in addition to annual salary.
Furthermore, for new promises as of January 2019, there will be a mandatory employer contribution with a flat rate of 15%, provided that the employer saves social security contributions through salary conversion (Gehaltsumwandlung). The employer must then pass on the extra contribution to a Pensionskasse, Pensionsfonds (both IORPs) or Direktversicherung (direct insurance).
The law also allows improves the EET (exempt, exempt, taxed) fiscal framework for contributions to IORPs and direct insurance. As of January 2018, the allowable deduction for annual contributions have been be raised to €6,240 (8% of the statutory pension income ceiling) and half this amount will be exempt from social security contributions. Occupational pension benefit payments, however, are later generally subject to public health and long-term care insurance contributions.
Periods of employment without income, such as parental leave or sabbaticals, often result in gaps in retirement planning. In the future, employees will therefore be able to pay substantially higher retroactive contributions within the EET regime into occupational pension schemes.
Parties to a collective agreement also now have a reliable legal basis for the creation of auto-enrolment schemes with a possibility for employees to opt out.
In the area of social law, the reform removes what has widely been considered a major psychological obstacle for low-income earners. For the otherwise means-tested basic old-age income, an allowance of up to €204 per month has been created for income from occupational pensions or the so-called Riester pensions (EET and extra state bonus).
Riester-pensions – introduced in 2002 and existing as both individual contracts and occupational schemes – benefit from higher government incentives. The basic subsidy for an adult was increased from €154 to €175 per year. The tax allowance €2,100 per annum and the yearly subsidy per child €185 per child (€300 per child born after 2008) have remained unchanged.
Most importantly, if contributions to an occupational pension system have benefitted from Riester incentives, deductions from pension income for the public health and long-term care insurances no longer apply in the pay-out-phase.
The so-called social partner model could bring about a real paradigm shift in Germany. This is based on the ability of collective agreements to grant pure DC promises, which are supposed to be “jointly steered” by the social partners and organised via IORPs or direct insurance. The system must be designed as a collective DC system and the performance outcome follows a defined-ambition approach based on the legal regulations. Guarantees given by either the sponsoring company or the IORP/insurer are explicitly prohibited.
So far, there are no clear indications of first collective agreements setting up a social partner model. Bargaining rounds in relevant sectors have either not yet taken place (for instance in the chemical industry) or have started under different premises. The recently completed bargaining round in the metal sector focused on working time flexibility and pay but also made a future commitment to enter into negotiations based on the BRSG framework.
In other fields, the implementation of the reform is making progress. On 6 December 2017, the Federal Ministry of Finance published a comprehensive circular (BMF-Schreiben). It is expected to facilitate a smooth implementation of new tax rules and to give guidance to companies who have to make adjustments to existing systems.
Brussels and EIOPA
In the longer term, the success of the BRSG will depend on the willingness of German employers and social partners to embrace the new possibilities. But as the reform relies primarily on IORPs and on direct insurance, another key factor will be the future development of Prudential regulation on the European level.
Here, aba is concerned about several political developments on the European level that could ultimately provide headwinds rather than tailwinds, and which could weaken the potential of the law and its ability to provide a stronger a second pillar.
Most importantly, aba has objections to the current plans of EIOPA, whose guidelines and recommendations are not needed to complement the IORP II Directive. The IORP II Directive itself respects the fact that occupational pensions are embedded in national social and labour law and sets minimum standards rather than aiming for full harmonisation.
Therefore, as to the European Commission’s current review of the European Supervisory Authorities (ESAs), aba disputes the need for a full supervisory convergence in the field of occupational pensions and opposes any attempt to establish direct supervision structures between EIOPA and individual IORPs.
Accordingly, aba is also against replacing the current co-financing of EIOPA by the national supervisory authorities with direct industry levies. It also strongly feels that there is no need for an overhaul of the decision-making bodies of EIOPA. National representatives with detailed knowledge of occupational pensions should continue to play a key role in all decisions on IORPs.
As to the reporting requirements, aba strongly feels that IORPs should be strictly limited to what is actually needed. All costs of statistical and prudential reporting have ultimately always to be borne by beneficiaries and sponsoring companies. Therefore, close coordination and streamlining of all EU and national reporting requirements should take place as a matter of course.
As to the planned pan-European personal pension product (PEPP), aba doubts that there will be any positive contribution to the strengthening of funded pensions, particularly in member states with significant occupational pensions. The proposal is loaded with ambitious macroeconomic goals – such as increasing liquidity and depth in the capital markets or enticing investments in the real economy or in infrastructure projects – that have little to do with the main purpose of pensions, which is providing for a secure and reliable additional source of income after retirement.
The proposed regulation focusing on the accumulation phase could fit a saving product – but not a pension product. In Germany, life-long pension payments have a long tradition in occupational pensions and are a key requirement for the EET taxation model for personal pensions. Aba is therefore highly critical of the Commission’s expectation that member states will grant all PEPPs the most favourable tax treatment available to their domestic personal pension products regardless of their product features.
Klaus Stiefermann is secretary general of aba, the German occupational pensions association, Cornelia Schmid and Andreas Zimmermann are senior policy advisers