Sector fund proposals: A new tune for German pensions?
The German government wants more companies to participate in the second pillar with the introduction of §17b sector pension plan. But the pension industry is hard to please, finds Barbara Ottawa
There has been a buzz on the German occupational pensions scene. “Finally, something’s happening”, was a phrase industry representatives were heard to say. Then the social partners pushed the reset button – again.
Last autumn, the government presented a proposal for the creation of industry-wide pension plans (Tariffonds) on a pure defined contribution basis (see panel). As this would have been a complete breach with the German tradition of guarantees, the pension industry rejected the proposal outright. However, the federal Ministry for Labour and Social Affairs (BMAS) was quick to draft an amended paper and presented it at the end of January.
Pension representative groups have since been scrutinising in detail the proposals that the government intends to help strengthen occupational pensions and increase coverage.
But in early March, after another round of talks, both social partners – the German federation of trade unions (DGB) and the association of employees (BDA) – had made up their minds: Thanks, but no thanks.
For the DGB, the new vehicles make it too easy for employees to relinquish their responsibilities regarding guarantees. However, the BDA would like to have this option even for companies that decide against joining the proposed plans.
The unions also fear the complexity of the new system. Both social partners agree that the insolvency protection is insufficient and fear for the competitiveness of existing pension plans.
However, the BMAS has triggered a debate which will continue. In their reactions both social partners offered tempered support if the proposals were sufficiently amended, so they might make sense after all.
In his role as chairman of the German occupational pension association (aba), Heribert Karch emphasises that the plans must receive the backing of all social partners. “In order to avoid a paper tiger, the tax and social security framework has to be adapted to better suit industries’ needs,” he says, reiterating that the aba will only comment on a technical level and will “not try and steer the political debate, which has to be led on the topic by the social partners themselves”.
The government argues that the liabilities assumed by companies offering pension plans are one of the obstacles to greater participation in the second pillar – this was confirmed in a survey of SMEs commissioned by BMAS in the first half of 2014 in which companies assigned this factor five or six nuisance points out of 10. Others included complexity and the lack of in-house knowledge to set up a pension plan.
§17b – a new buzzword in German pensions
The new legal provision for the creation of sector-wide pension plans is an amendment to the law on the improvement of occupational pensions (BetrAVG). This was first introduced in 1974.
The current paragraph 17 concerns the possibility to integrate provision for occupational pensions in collective agreements made between employers and unions. Few industries have taken advantage of this.
Under the proposed amendment it would be possible to create sector-wide pension plans on a defined contribution basis with a minimum guarantee. This would not be the employer’s responsibility but the pension fund’s. Funds would also be open to employers not part of any respective collective agreement.
Such schemes could be set up as Pensionskassen or Pensionsfonds vehicles and would have to join the pension invsolvency fund (PSVaG) to insure guarantees in the case of insolvency, although it is unclear how this would work in practice.
These obstacles can be addressed through a sector-wide pension plan as existing examples in the metal and chemical industries illustrate. Employers can choose to use these retirement providers, set up by the social partners, with the advantages of a collective scheme and economies of scale. “Companies were and are eager to keep the costs for occupational pensions in check,” note Lutz Mühl and Anne Augustin, representatives of the chemical employers’ association BAVC in a book in which various stakeholders answer questions on their ideas on the future of the German second pillar. The authors add that the cost factor will become more important as the number of active workers continues to shrink compared with the number of pensioners in a pension fund.
One particular example of a pension provider set up by social partners is BVV, for the banking sector. It was set up in 1909 and now offers a choice of occupational pension arrangements for the financial sector. Some 750 financial institutions use the €25bn BVV, which has 350,000 active members and 100,000 pensioners.
At a glance
• New ‘§17b’ sector-wide pension vehicles proposed by the government, would assume responsibility for liabilities from employers, which are regarded as a disincentive.
• The government last year rowed back from a proposal to introduce pure DC funds on a sector basis.
• Pension industry representatives have been cautiously positive about the revised proposals, social partners less so.
• Details of insolvency protection are yet to be determined; the current PSVaG arrangement only covers individual employers.
“For employees, it is very important to have a third-party institution managing their money,” says Marco Herrmann, head of strategy, legal and communications at the BVV. The BVV is organised as a mutual association and major decisions are made by the annual association’s general assembly with member participation. “Even in challenging times like these people trust in institutions that have survived two world wars,” Herrmann adds.
Within the BVV, each participating company must fulfil certain minimum standards when it comes to contributions; employers, for instance, must make contributions of at least 50% although each is free to make individual arrangements within these limits. Herrmann is optimistic that the BVV would count as a social partner institution under any new legislation and says the institution is open to the proposals. “We already have a very high coverage of the sector,” he notes.
The government is determined to spark a debate on occupational pensions and behind semi-closed doors whispers of possible opt-out models can be heard. “Since the introduction of the salary sacrifice there has been a deadlock,” Peter Weiß, pension spokesman for the conservative CDU, said in a recent interview with MetallRente’s video news channel, referring to the 2002 reforms.
In a similar interview, his SPD counterpart, Martin Rosemann, named Sweden and the Netherlands as model systems because of the strength of social partners with respect to occupational pensions, which he says leads to greater coverage. He also notes that a strong second pillar should guarantee a higher replacement rate: “We will not be able to achieve this just from the first pillar,” he comments.
BMAS has looked into other countries’ experiences with industry-wide pension funds but emphasises that no conclusions have been drawn. Further study will depend on the outcome of talks with the social partners.
Uwe Buchem, Mercer’s market business lead for retirement in Germany, believes a revised draft law will succeed but foresees much room for manoeuvre. “This is paradigm shift in the German occupational pension sector which, so far, has solely been a voluntary arrangement by employers, and which would now be under the influence of social partners,” he says.
Buchem says it remains to be seen how industries with high staff turnover and labour fluctuation would adapt pension vehicles to suit the needs of employers and the workforce. It is unclear whether sectors will include mandatory participation, although Buchem believes it is a possibility.
The BMAS proposal foresees that sector pension funds would be open to companies not part of a collective agreement, which Buchem welcomes, although he raises concerns about how insolvency protection would work in a system that has so far only covered individual companies.
Towers Watson has been critical, fearing employers will be put off by a one-size fits all approach of industry-wide pension plans. This, it says, will remove responsibility and the interest in occupational pensions from employers and reduce pensions to a “mere cost factor”. The firm sees a competitive disadvantage for companies not participating in the new funds and retaining their own individual pension arrangements.
Towers Watson predicts that industry-wide pension plans will have to invest conservatively to ensure the minimum guarantee assumed from employers. This means returns will be lower than in occupational pension plans and employer contributions will have to be higher. It also criticises the lack of tax incentives in the exisiting framework.
It has been a while since the government has come up with a proposal that has triggered such debate in the German occupational pension sector. Some predict that no final draft will be published, while others are more optimistic. The federal Finance Ministry (BMF) is currently conducting a study on fiscal and direct financial incentives for occupational pensions. In the end, top-ups and tax might once again be a decisive factor in any final decision.
Sector-wide pensions in the Netherlands
Germany’s supplementary pension assets account for 6.3% of GDP and total less than €200bn according to the OCED. In the Netherlands by comparison, assets account for over 160% of GDP and total over €1trn.
Arithmetic says Germany could catch up quickly if it were to boost access to second-pillar pensions.
The difference is a tradition of sector and company pension funds that dates back several decades. Added to this is a quasi-mandatory system – individual sectors can mandate pension contributions through collective agreements and most do.
There have been considerable changes to the Dutch defined benefit pension model. While there are still a considerable number of company pension funds (over 270), the total has halved in 10 years, as a result of pressure from the regulator, the Dutch National Bank (DNB). A large number of company schemes have been absorbed by insurers or sector funds, whose number has remained constant at 60.
Dutch pension funds are independent entities distanced from the employer. There is no need for an insolvency protection fund because the DNB requires full-funding of liabilities, as defined in the financial assessment framework for pension funds, known as the FTK. Funds must cut benefits if necessary if their coverage ratio falls below the statutory minimum and are restricted in their investment freedom while underfunded.
In total, these changes mean that the Netherlands has effectively moved away from a defined benefit framework and could now best be described as a ‘collective defined contribution’ system. Current proposals could change the system further if they introduce greater investment freedoms for individuals.