Pensionsfonds: Still ironing out the kinks
The industry has welcomed a new proposal that could give German Pensionsfonds more flexibility, but some are disappointed it is not part of a broader reform, Barbara Ottawa finds
At a glance
• A government proposal would introduce drawdown-type options for members of German Pensionsfonds.
• Individual opt-outs from PSV protection are beong mulled.
• The industry awaits major reform to streamline Pensionsfonds and more reform proposals are expected for next year.
The German government is seeking to address problems with the payout phase of certain forms of Pensionsfonds and the insolvency protection of reinsured contracts. Providers have requested amendments to laws covering insurance (VAG) and occupational pensions (BRG).
For one, the proposal would bring greater flexibility to Pensionsfonds during the payout phase. In Germany, defined contribution (DC) funds have to be set up with a minimum guarantee, or Beitragszusage mit Mindestleistung (BzML), and if a Pensionsfond is used as the vehicle for this type of pension plan the pay-out phase has to contain an insurance element.
These restrictions are one of the reasons why Pensionsfonds are little used at present for the payout phase directly, but rather as a financing instrument for payouts. The new proposal by the German Labour and Social Affairs Ministry (BMAS) aims to change the norm by allowing the application of a 0% discount rate on all pensioners’ assets in Pensionsfonds. Employers would only be required to top up assets if returns fell below this rate.
On the one hand this would allow Pensionsfonds to seeks higher returns on retired members’ assets by taking more risk in drawdown-type schemes. On the other hand it would also introduce flexible pension payouts, which is something as yet unknown for German retirees. Volatility of pension payouts is one of the main concerns the pensions association, aba, voiced in its reply to the BMAS’ proposal. The association noted people “will have to deal with volatile top-up elements” after having grown accustomed to “very predictable” pension payouts.
Further, it warned that company liabilities could increase in certain cases under the new regulations compared with the current ones. Overall, however, the new regulation could help “increase acceptance of and participation in the second pillar”, the association said.
Aba’s managing director, Klaus Stiefermann, says the measure should not lead to any immediate dramatic changes: “First of all you cannot alter existing contracts; the changes would only apply to new members,” he points out.
This is also confirmed by Carsten Velten, head of pensions and risk benefits at Deutsche Telekom: “In our Pensionsfonds 100% of pay-out promises are reinsured and will therefore not be affected by the new regulations.”
However, he welcomes the amendment, which he says makes the minimum guarantee more attractive. For future members this could mean that the pension at the beginning of their retirement is higher than under the current annuity-based pension payout plan. “By disconnecting payments from the legal maximum interest rate set for insurers the problem of continuously shrinking initial pension payments is avoided or at least reduced”, Velten notes. The financial services supervisor BaFin has repeatedly lowered the maximum legal interest rate insurers can guarantee from 4% in 2000 to 1.25% this year.
When the Pensionsfonds was set up in the early 2000s, guarantees for insurance-based solutions were still fairly high. But the current rate is expected to go down to 1% or below should the low-interest rate environment continue.
“This is one step further towards what the Pensionsfonds was intended to look like originally,” Stiefermann says commenting on the current government proposal. He points out that the introduction of the new vehicle was perhaps hasty, “literally between Christmas and New Year”. It should have much greater flexibility for the payout phase but a minimum guarantee DC plan was all that could be achieved politically.
“Over the last years a few kinks have been ironed out but only ever bit by bit,” says Stiefermann. He would like to see “one major reform to round off the edges and streamline the vehicle.”
“By disconnecting payments from the legal maximum interest rate set for insurers the problem of continuously shrinking initial pension payments is avoided or at least reduced”
A demand the industry has been making for several years now is to make it more attractive from a tax point of view to transfer active members, for future service to a Pensionsfonds rather than another vehicle.
Unlike the current proposal, this would directly impact tax income and it has therefore not yet seen the light of day. But the pension industry’s wishes could be addressed soon. The Finance Ministry has commissioned an extensive survey into tax incentives, misguided incentives and their effects in the second pillar. “Paragraph 3.63 on the taxation of contributions to Pensionsfonds is among the topics which are being looked into,” Stiefermann confirms.
A second element to the current BMAS proposal has found positive resonance in the industry and many stakeholders believe it is likely to succeed. This affects insolvency protection under the Pensionssicherungsverein (PSVaG), the industry’s mutual insurance body.
This would allow individual members to opt out of PSV protection in case of their employer’s insolvency and instead continue to be covered by an existing reinsurance plan for the payouts from the Pensionsfonds. This could be especially attractive for those with older contracts at a higher guarantee rate.
Further, Velten points out, it would be advantageous for employees because the processing of reinsured pension promises by the PSV often takes considerable time and in most cases leads to disadvantages for insured members. Velten like many other experts, also expects the measure to “ease the burden on the PSV”.
As the transfer of reinsured contracts into the PSV fund is complex it would help if some members had the opportunity to opt out of this protection. But Stiefermann predicts that few are likely to make use of this option straight away. “Many will wait for someone to make this step first,” he says.
But Stiefermann is quite certain that the amendment to paragraph 8 of the law on occupational pensions will proceed. Such a substantial change would most likely not have been proposed without prior discussion with the PSVaG, he says.