GERMANY - Tax advantaged contributions to the new second pillar pensions arrangements in Germany could be much higher than generally thought.
According to a Morgan Stanley Dean Witter (MSDW) study, maximum tax-exempt contributions could be twice as high in occupational pension provision as in the third pillar.

MSDW’s Peter Koenig in Frankfurt, the author of the study, says: “Everybody assumes the tax-free contributions would be 1% in 2002/03, increasing by one percentage point each year to 4% after 2008. But somehow in the new law they have mixed up the default compensation and employer contributions, we think.”

Reading of the law, he says, shows that the individual contributions can be for either an individual (third pillar arrangement) or an occupational scheme (second pillar) but not both, and that the employer can then add another 4%.
This means that the combined tax-free contribution of 5% in the first year increases to 8% after 2003.
“So, where the government is thinking of DEM10bn in tax income losses, it could be DEM45bn when all the other tax breaks available are included,” says Koenig.

When all the other tax breaks available are included, the total that could be contributed would be more than 10% of pay. This level of contribution approaches what MSDW believes is the level of tax allowances needed to reach the level of investment required for Germany’s pensions liabilities.
According to the study the investment at the 5% contribution levels mean the projected inflows into the capital markets could be e33-53bn in 2002 depending on the assumptions made. This could increase to e75-110bn in 2008.