Germany: A disappointing revolution
The government is opening the door to pension plans that will lighten the burden on companies, yet the pensions industry is still dissatisfied, Barbara Ottawa reports
At a glance
• The German Parliament is to decide on the introduction of DC plans – a first for Germany.
• The pensions industry is disappointed with the final draft for new plans.
• It is feared that the new system will add more complexity.
A world without guarantees can be difficult to fathom for Germans. Until now, any retirement product offered in the country had to include some sort of guarantee. In many cases, the employer had to agree to make top-up payments in the event of a funding gap. But now all this has changed.
But they do not refer to them as defined contribution (DC) pension funds in Germany, although the proposed new reforms technically contain a pure, pay-and-forget structure for the employer. The term ‘defined ambition’ (DA) – or Zielrente, which translates as ‘target pension’ – is used much more widely in the current debate on changes to the German second pillar.
Whatever they are called, the absence of guarantees has come as a surprise. Even the much-acclaimed ‘Lex Bosch’, a milestone in the recent history of Germany’s occupational pensions, includes a minimum floor. Bosch was the first to introduce a pension plan with flexible pension payouts depending on the performance of the portfolio.
This is generally considered to have been the first step towards finalising the so-called Betriebsrentenstärkungsgesetz (BRSG) – the ‘law for strengthening occupational pensions’ – presented to parliament for discussion just before Christmas. It is part of a larger comprehensive pension reform package comprising different legal amendments that social minister Andrea Nahles, from the social democratic SPD, has put together. Among other things, it contains a 46% floor for the replacement rate from the first pillar and a promise not to raise first-pillar contribution rates per person above 25% before income tax. In the third pillar, the minister wants to introduce a standard Riester product to serve as a benchmark.
The proposed reforms – particularly promises to be made for the first pillar – did not enjoy the full support of the SPD’s senior coalition partner, the conservative CDU. When it comes to the BRSG, however, conservative MPs have already praised it as “a real revolution in the German social framework”, “a major change of course” and a “great leap”. These attributes were mainly used in parliamentary debates with left-of-centre parties, such as Die Linke, being strongly opposed to any end to guarantees.
More second-pillar pensions – maybe
With the BRSG, the German government wants to increase the number of people covered by an occupational pension plan. The new law is therefore set to introduce subsidies for pension contributions by people on lower incomes and for smaller companies. As in many countries without a mandatory system, smaller companies are underrepresented when it comes to offering occupational pensions.
Under the new system, certain industries with collective-bargaining agreements (Tarifverträge) will be allowed to set up their own pension vehicles, or use existing ones. These Tarifpläne have to be set up without any guarantees, to ensure employers do not have any additional financial burden other than the contributions they promise. On retirement, some of the accrued capital is then paid out from a drawdown plan, allowing the member to generate returns for higher payouts.
“This is actually not a strengthening of occupational pensions”
The idea of a variable pension payout is something new for German workers. But the unions have agreed to the concept in principle, as long as it is covered by a collective bargaining agreement. Companies outside such agreements can still only set up pension plans with guarantees. Because it is not mandatory for German companies to be part of a Tarifvertrag, about 40% of companies have not joined one, and another 30% have committed to only some of the minimum standards. To what degree these two groups will have access to the new pension plans remains to be seen.
Another feature new to the German landscape will be the possibility to offer an opt-out model. The current occupational pension framework does not allow for any form of auto-enrolment, but the new plans for companies, subject to collective agreements, can include such models.
To increase participation in the second pillar, the government also plans to widen the range of tax incentives, while supplementary pensions will no longer be fully counted towards assessing people’s income when they apply for basic income (Grundsicherung). This step was taken to show low-income workers that paying into a supplementary pension plan may be effective in increasing old-age income.
According to Nahles, the reform package will make occupational pensions “simpler and more attractive”. Finance minister Wolfgang Schäuble (CDU) added: “It provides additional incentives for more occupational pension contracts.” It will mainly benefit employees in SMEs, as well as people on lower incomes.”
Should the unions and employers make use of all the new options, this pension reform could be a turning point. Heribert Karch, chairman of the pension association aba, says: “In fact, the final reform draft is nothing less than the full integration of occupational pensions into pensions policy. This might even turn into a fully fledged pension system with a dual core – the state and companies.”
But many in the pensions industry are sceptical about how the new options will be perceived, and to what extent they will be used. When the draft law was presented to parliament in December, it was expected to pass with small changes, given the CDU and SPD’s large majority. The conservatives hold 310 of 630 seats, and the SPD holds another 193, with the Greens and Die Linke sharing the rest almost equally.
The pension sector itself had been disappointed in the final draft and was hoping to sway some parliamentarians to push for amendments. One of the strongest points of criticism was that Nahles largely ignored input from stakeholders.
• The insurance industry lobbied against a complete ban on guarantees in the new plans, fearing the loss of their competitive advantage.
• The aba association and other stakeholders were disappointed about the extent of tax incentives. For example, while the amount an employer can contribute to a pension plan annually tax-free has been doubled, these contributions are still not exempt from social contributions such as healthcare and first-pillar pensions.
• A demand to include collective pension plans without a collective agreement was also ignored.
• Consultants bemoaned the fact the new law was not used to amend obvious flaws in the occupational pension system. Michael Karst, head of legal at Willis Towers Watson ’s German pensions division, even went so far as to say: “This is actually not a strengthening of occupational pensions.”
The fact is that, no matter how much the new pension plans are used, they will add further complexity to the occupational pension system. Companies already have to choose from six different ways of setting up a pension plan. Not every option is suitable for every company, depending on age structures, liabilities and risk-appetite. Indeed, some larger companies, especially those that have made acquisitions in recent years, can end up with several different pension plans – which cannot be reconciled under the current legal framework.
“For employees and employers,” says Fabian von Löbbecke, board member at Talanx Pensionsmanagement, “it would have made more sense to improve the existing occupational pension framework than to further complicate it by adding a parallel system with its own set of rules.”