Top 1000 Pension Funds: Progress on pooling through AIFMD implementation
Jonathan Williams notes the advent of the Investment-KG pooling vehicle but few policies to support occupational pensions ahead of September’s federal election
On the eve of the German federal election, pledges to reform pension provision are coming from both the left and right of the political spectrums – with changes suggested to the Riester-Pension and calls from Die Linke for a more comprehensive first-pillar system.
The most important regulatory change this year, by far, however pre-dates the election and is triggered by the European Union’s Alternative Investment Fund Managers Directive (AIFMD). Implementing the directive, the German federal finance ministry looked to create a tax-transparent fund for asset pooling to rival similar structures in place in the Netherlands, Luxembourg and, since then, the UK.
The Investment-Kommanditgesellschaft (Investment-KG), as legislated by the Kapitalanlagegesetzbuch (KAGB), will finally allow pension assets to be pooled in a domestic vehicle without concerns over the tax liabilities the investor might incur. Lawyers noted that the concept had not been introduced for reasons of the associated tax complexities, whereas the KAGB will function as a replacement of the existing Investmentgesetz (InvG), allowing the ministry to start with a blank slate.
Whereas pension assets are often currently invested in Spezialfonds and mutual funds (Publikumsfonds), the new tax-transparent vehicle is designed with institutional assets in mind, as a way of attracting institutional capital back to Germany and away from non-domestic vehicles, such as Luxembourg Spezialfonds. Explaining its rationale for the Investment-KG, the finance ministry explicitly cited the €350bn in pension assets of German companies, including those of overseas subsidiaries, that could be attracted back.
More important for the industry’s future is the expansion of the second pillar – potentially aided by a quasi-mandatory or auto-enrolment system, as suggested by groups, including pension association AbA. While shying away from a compulsory model, the association has spoken of the need for incentive without brute force as a way of increasing coverage in a country undergoing one of the worst demographic shifts in Europe. One way would be for heavily unionised sectors to begin including pension arrangements (bAV) as part of the collective bargaining rounds, as is the case with the finance and chemical workers.
In common with other European countries, German funds have been struggling with the fallout of the low-yield investment environment, leading to calls for a reduction in the accounting yield applied to discount expected returns to mirror the discount rate applied to obligations.
Commentators, including Towers Watson, have been hopeful of change in pensions policy following the looming election in September. The Christian Democrat (CDU) and Christian Social Union (CSU) parties have pledged to strengthen the system while defending it against European intervention – a pledge possibly less relevant in the wake of the European Commission’s decision to indefinitely postpone the introduction of the revised first pillar of the Institutions for Occupational Retirement Provision Directive.
Importantly, however, the parties have accepted the need for greater clarity in the market and pledge to emulate the Dutch and Danish model to allow individuals easy and fast access to any pension rights they may have accrued across all pillars. The parties argue that with better information available, workers will be able to tackle any savings shortfalls in advance – while additionally seeking to encourage greater contributions from low-income earners to second- and third-pillar arrangements.
The liberal FDP, Merkel’s current junior coalition partner, echoes calls for measures to ensure occupational pensions are attractive to as many workers as possible, but urges against the creation of a single pension insurance approach by potentially including assets currently accumulated in Versorgungswerke by occupational pensions of liberal professions, such as doctors and dentists.
The opposition social democratic party (SPD), in 2002 responsible for the introduction of the Riester-Pension, is calling for increased cost transparency in the savings model aimed at low earners. Traditional allies Bündnis 90/Die Grüne back proposals for a fundamental reform of the Riester-Pension, suggesting a cheap and safe default option for said aspect of pension saving. The SPD also sees the increased coverage of occupational pensions as key, proposing it be expanded into areas not traditionally covered by quasi-mandatory arrangements such as collective bargaining.
An area where the Greens and SPD differ is over the level of protection to be offered by the country’s first pillar. Whereas the SPD sees need for the introduction of a ‘solidarity pension’ – rewarding workers who have paid into the system for longer than 30 years with at least €850 a month – Greens see the risk distribution between state-funded and bAV as “fundamentally correct”. The concept of a minimum threshold nonetheless appears in their manifesto, re-branded as a guaranteed pension.
The only major party not pushing for some expansion of the bAV is Die Linke, which argues instead the onus to provide should remain with the state and the first pillar.
However, in common with the SPD, the party does call for an end to different levels of payments between the old and new federal states well over two decades after German reunification.
There is plenty of scope for reform within the second pillar, but quite how radical the changes will be depends on whether Merkel is able to return her current coalition to power, if there is a revival of 2004’s grand coalition power-sharing arrangement between SPD and CDU – or even a ‘traffic light’ coalition led by the SPD and propped up by the Greens and the FDP.