Reform of the legislation surrounding pensions in Germany paved the way for new breeds of scheme. The Riester-reform – which aimed to tackle the problem that an ageing population meant for the overstretched state pension system – created opportunities for new funded solutions.
But beyond this, pension providers in Germany have come up with some of their own innovative types of retirement benefit product.
For more than two years now, employers, asset managers and industry organisations have been able to use the new Pensionsfonds structure for pension products. So far there have been 27 Pensionsfonds approved by BaFin. Some of these are corporate schemes, including the Bosch PF AG and the Telekom PF. Others are multi-employer pension funds such as Pensor, and then there are industry-wide pension funds such as the PF Chemie.
Christian Mosel is head of pension fund business at Commerzbank and on the board of Pensor Pensionsfonds. Pensor is 51% owned by Commerzbank, with the remaining 49% in the hands of three large German actuarial firms, Heissmann, Hoefer and Heubeck.
“The Riester-reform was originally intended to replace part of the pensions and social welfare system; it was more on the side of private pension schemes,” says Mosel. But while it failed to a certain extent in its aim of incentivising private pension schemes, it did revitalise occupational pension schemes in the process, he says.
Heribert Karch, joint managing director of the Berlin-based Metallrente pension scheme also says the private pension provision foreseen by the Riester-reform has fallen flat. “I would say what was seen rather negatively (within the reform) was the pure private pension – the third pillar,” he says. “The part that was really welcomed was the second pillar.”
There were great hopes that the German law brought in to implement European legislation would give a great boost for pension funds. But so far, says Mosel, this has not been the big success that was anticipated. But apart from Pensionsfonds, there was another method under the law by which occupational pensions could be organised. This method – the Pensionskasse – was much more of a success, says Mosel.
Though of course Pensionskassen did exist in Germany before, this was only in the form of single-company pension schemes. Now there are 25 Pensionskassen run by insurance companies. Pensionskassen are regulated by the same body that regulates the insurance industry.
The new multi-employer funds such as Pensor are offered to clients in a two-step approach, says Mosel. The first stage is to offer them to employers, and the second is to market them to the employees themselves. Employers who do not already offer some type of occupational pension provision to their staff are obliged under the Riester legislation to begin doing so. They have the right to choose the method of delivery; they can opt for direct insurance, Pensionsfonds or a Pensionskasse.
The main difference between the pension fund structure and the Pensionskasse, is in the way it is allowed to invest. A pension fund can invest up to 100% of its assets in stocks whereas a Pensionskasse is limited to 30%.
And paradoxically, it is this investment freedom that has hampered the popularity of the Pensionsfonds. “When the legislation was passed in 2000 and 2001, there was very much more optimism regarding the stock market,” says Mosel.
But for an individual pension scheme member, there is not much difference between the pension fund and a Pensionskasse, says Mosel. However, the real advantage of pension funds is for the sponsoring company. In many cases, pension funds have been used by companies that need to deal with their unfunded book reserve pension schemes.
Typically, German companies have held their pension liabilities as book reserves. Though domestically, up to now, this solution has worked satisfactorily, in the increasingly international business environment these unfunded pension schemes can be a millstone around a company’s neck.
When a German business is sold to a company outside the country, such as the UK, US or the Netherlands, the buyer is often uncomfortable taking on the pension liability. The answer is then to transfer the liability to a separate pension fund, which leaves the company which is to be sold with a clean balance sheet.
“Pensor is a specialist in transferring liabilities,” says Mosel. Advisors who are facilitating merger and acquisition (M&A) situations often want to pre-empt the difficulties that pension liabilities can cause. They avoid the stumbling block in M&A negotiations by using a pension fund such as Pensor to transfer the liabilities into.
“Most of our business comes out of this particular situation,” says Mosel. “We have a couple of transferrals in the business pipeline.”
The M&A market has dried up somewhat in the last two or three years in Germany. But Mosel foresees another source of business opening up in the form of Germany’s vast Mittelstand – the tens of thousands of smaller companies which have staff numbers of between five and 2,000.
In most Mittelstand businesses, there is an occupational pension scheme in the form of liabilities on the balance sheet. Mosel believes many of these new-generation small-business owners are likely to use pension funds as a way of clearing the balance sheet.
There has been criticism in Germany about the way the law operates with regard to the new pension products. They are often too complicated for the average person to understand, which makes them less attractive and more expensive to administer.
Mosel, too, thinks the current form of new pension provision in Germany is too complicated and administratively unwieldy. “It’s a big hassle,” he says. “You have to scribble a lot of details onto different forms, then the tax authorities have to decide on the taxation… it’s very complicated for the providers as well as for employers. It’s a big bureaucratic monster.”
There is a move afoot to get the legislation simplified, but it remains to be seen what will actually come of this. It is important that difficulties are ironed out, because pension provision in Germany must work in practice.
“It is very clear that the state can’t cope with the challenge in the future,” says Mosel. “So it (the new forms of pension provision) makes a lot of sense. But the complications are a shame.”
Karch agrees that second pillar pensions in Germany do have a complex structure. But despite this, he says that it is quite clear that this new breed of pensions is a success.
But it will take time before real progress is made. The Riester-reform anticipated a much more rapid transition to the new form of pension provision than was realistic. “Typically one thought that in two or three years it would be completely implemented in Germany,” says Karch. “That was, in my opinion, complete nonsense. Such processes need time, at least when they are voluntary.”
The Metallrente scheme, says Karch, has been very successful in all its operations relative to the market. And on the client side too. “We had a product strategy as well as a sales and marketing strategy,” he says. The success had to do with the solutions offered by the scheme’s advisers, and this was key.
“People are not buying radios, after all,” he says. “Many people underestimated the importance_of that, but we went another way. We needed a strategy for selling, and in the end that really did help us,”
Under the Riester-reforms, the tax support granted to second pillar pensions is better than that given to third pillar pensions. Through tax relief and the way health insurance is treated for employees, for every 50 cents saved in the pension scheme, a euro is invested.
Two factors are likely to affect the flow of money into pensions in the near future. One comes as a result of the Investment Modernisation Act, which changes the taxation of unit-linked insurance policies. They will become subject to capital gains tax, and therefore lose their attractiveness. Before this takes effect, Karch predicts “a certain ‘last orders’ effect” this year, with money being channelled into these products. But I expect next year that market will fall drastically, and pension investment will increase.”
Also, the current legal reform of unemployment benefit will have an indirect effect on pensions. Under the reform, the jobless will be obliged to use their own financial assets to support themselves after the first year of receiving benefit. Their financial assets will be assessed, but pensions will not count as assets they can draw on.
“That means that in the future, people will put more strategies in place to deal with life risks… they would rather put money in the pension system where it cannot be taken away,” says Karch.
What is needed now, says Karch, is stronger support from legislators in favour of second pillar pensions. “In Germany, lawmakers must steer things somewhat more clearly, so that money goes into second pillar pensions. This type of provision is the most attractive because it is dealt with via the employer. More should be invested in the second pillar (than in the third)” he says.
Are there likely to be more Pensionsfonds and Pensionkassen launched, or has the wave of new products reached the shore? Mosel sees no new growth in pension funds for the time being, at least.
Neither does Karch foresee the creation of new industry-wide schemes. “I don’t think there will be any more. I think the ones that are needed are already there.”
The pension reform two years ago was a chance for pension schemes to get a step ahead in the defined contribution (DC) world, says Carsten Eckert, managing director and head of pensions business at Allianz Dresdner Asset Management. But this has not happened completely, because the new schemes which resulted contain minimum capital guarantees.
However, there are more and more DC oriented products in the German market, he says, including the Chemie sector pension fund and the components of the Metallrente scheme. Allianz Group leads the consortium which runs Metallrente. Metallrente combines elements of Pensionskasse, direct insurance and Pensionsfonds.
With its involvement in the Metallrente operation, ADAM is satisfied with its record as a provider of the new breed of German second pillar pensions. “We think we are at the forefront there, together with the insurance partners,” says Eckert. “This is very much a successful operation, and the social partners are happy with it.”
Though there do not appear to be any concrete plans in Germany to launch new industry-wide schemes along the lines of those already brought to market, Eckert believes it is only a matter of time. “I don’t know if anything is coming in the near future, but I think that since the success of Metallrente and the Chemie pension fund, there will be more,” he says.
And the multi-employer schemes which have been created are bound to proliferate further too. “The successful way they have entered the market will create some interest for the social partners in other sectors,” says Eckert. “It would be a surprise if nobody else opted to transfer into this more open type of pension scheme.”
The drive will come in large part from corporations keen to find a way of externalising their pension liabilities.
But looking further ahead, it is hard to say which of the many forms of pension provision will win favour with employers and employees. “It depends what demographics show in the future, and if there’s a way of delivering what is demanded… Employees traditionally do prefer defined benefit, but the question is whether the risk embedded in that is digestible for all partners or not.
“Everyone understands the problem, but the difficulty is finding ways of adjusting the existing schemes to future demands.”
ADAM has just launched a new type of employee benefits product which encompasses pension provision. It is called the FlexiPlusKonto, and is administered rather like an account which the employee holds with the employer. There are multiple parts to the product, which allows employees to defer salary and save overtime pay.
“These contributions can be accrued into a corporate savings account and there are different solutions later on,” says Eckert. “One can be a solution for early retirement.”
German law allows employees to take the benefits of this FlexiPlus account from the age of 55 onward, and the funds can be used to fund this. If on the other hand it is infeasible to retire before the age of 65, the FlexiPlus account can be switched into the corporate pension scheme.
There is no absolute contribution limit, and income from many different sources can be channelled into the investment account.
The blueprint for the FlexiPlus account originally came from Volkswagen, which devised a similar type of facility for its workers. But the idea has caught on. Employers like the concept because it offers them the advantage of reductions in administrative expense.
“Of course the financial services industry is challenged to offer more flexibility and less risk for the corporate employee… a blueprint for this creativity was VW’s, although they did have some very individual criteria,” says Eckert.