Occupational pensions provision is a declining German industry in terms of the numbers of staff employers cover. However, the reduction is gradual, down from 65% to 64% coverage over the past three years among employees in industry.
The situation does not look like reversing, given that the Germans are making a real meal of pension reform. Aba, the Heidelberg-based umbrella body representing the pensions industry, has no doubts as who is to blame. Its chairman Boy-Jurgen Andresen says: “The problem for the 20 years I have been an Aba board member is that each government promises to optimise the pensions framework, but in fact does the opposite - no matter what their political colour.”
Since 97% of companies with over 1,000 employees provide pension benefits, he says: “The focus of the political discussion is how can the small and medium sized enterprises (SMEs)have the same coverage.” The short answer is that it is not at all attractive for them to do so, hence less provision is likely at a time when aruguably there should be more.
One key area is that of defined contribution, the obvious way forward for smaller organisations. “At present under labour law, it is not possible to offer DC,” Andresen points out. As a pensions consultant himself with the Wiesbaden-based Dr.Dr. Heissmann firm, he adds: “Our practice has to find solutions very close to DC. So that if the employer wants to invest 2 or3% of pay into a pension arrangement, the actuary has to calculate a defined benefit pension for that level of contribution.” Aba has formulated proposals to introduce DC plans, compatible with the four established ways of pension provision in Germany. Employers need more flexibility, including the ability to offer hybrid schemes.
There have been lurching moves to reform, as with pension payement adjustments. Under labour legislation, employers have to review pensions in payment and adjust them for cost of living, unless the employer’s profitability has risen at a lesser rate. “To cover this burden, it is not possible to make book reserve provision, as the liability is unclear depending on an uncertain future, so German companies are underfunded in this respect.” Since the beginning of 1999, new legislation frees the employer of any other obligations where they agree to adjust pensions automatically by 1% per annum. “However, this only applies to new pension promises from last year,” he points out. The finance ministry blocked any moves that would allow firms to increase book reserve provisions and reduce the government’s tax take. Aba is pressing to have this “incalculable liability” on employers changed.
One achievement was the ability to buy out small pensions by means of lump sum payments. “Before this change, some companies could never go out of business, but had to continue in existence just to pay pensions.”
The vesting rules, which have long been a cause of head shaking by disbelieving outsiders and a source of friction with the EC, have been a domestic political marathon with Aba’s suggestions for liberalisation running into the brickwall of increasing book reserve provisions. “This will be on the agenda for the foreseeable future. Our position is that if we want mobile labour markets, we do not need to go to zero with vesting rules, but to liberalise to periods of three or five years. However, this must not lead to increased liabilities for employers. They must have the opportunity to compensate legally by reducing benefits and more liberal tax laws.”
The constant message back from the government is that any interference with the tax base will be resisted, but Andresen does not think this stance is viable. “The pressures on the government to liberalise the tax rules is extremely strong, not least because overall labour costs in Germany are so high.” Firstly, the methods of pension provision have different tax implications, with Pensionskassen and direct insurance having a tax on contribution as well as on the resultant pension. “A blue collar worker may pay 15% income tax, but 23% on his pension plan contribution, which does not encourage pension plan provision.”
He hopes that now since the government has manipulated its tax reforms, the occupational pension reforms can follow. Nearly everyone agrees contributions and accumulations should be tax free and pension withdrawals taxed. “The government is reflecting on this, but fears it will mean billions less in tax income.” Also, the government is waiting for a supreme court tax ruling on a civil servant who is paying full tax on his pension and claims this is discriminatory compared with social security pensions taxed at a lower rate. “No one knows when this ruling will come.” But timing is becoming crucial, as the government has only this year to formulate its pension proposals since it will need next year to legislate for them, he points out.
Recent years have seen a discussion about whether Germany should have a pension fund structure and, if so, what form this could take. This debate kicked off in 1995 with the research by Deustche Bank, which some feel was not an entirely unbiased source since asset management groups would be the main beneficiaries of such funds.
But Andresen believes |the airing of this topic
was highly beneficial. “It opened the eyes of many companies and consultants too, perhaps. It meant looking not just at different types of schemes, but of funding methods. Since an increase from 6% to 7% in the returns achieved per annum can reduce dramatically the overall cost of pensions in the long-term.” There have been a number of proposals, but in his view the government has not really focussed on this issue.
“Aba’s position is that we do have to modernise and our proposal is to change the law for support funds and develop these in the direction of a pension fund. While there is no agreement as to what constitutes a pension fund, we think plans should provide an annuity, death coverage for dependants and provide for disability.” These three aspects are covered in the social security system and it is only when these three are guaranteed that the state is free of risk, he says. “My own belief is that at least two if not all of these risks have to be covered somehow. Perhaps, there could be a lump sum up to the time of pension, when an annuity can be purchased on a collective basis. We have to be very open minded as to the way retirement income plans provide these benefits.”
With the social security system being re-evaluated, perhaps a consensus is emerging that a more mixed system is required, with 60 to 70% coming from pay-as-you-go and 30 to 40% being funded.
The debate about funding has gone in different directions, with the government chasing the idea of making third pillar pensions mandatory, but backed off in the face of public outcry. “Then there were ideas that social security itself could make up the second tier of funding, but even the politicians would not trust the politicking that might be involved in such a move.”
Early this year, Aba took the step of initiating a public discussion on having a mandatory occupational pension scheme. “This was not because
we are enthusiastic about manada
Andresen

tory schemes, but if the government was moving in this direction, it would make more sense for it to be at second pillar rather than third pillar level.” The response has been very divided, with employers genrally against the idea, while trade unions are in favour.
But the association is in a very good position to run such a discussion, since it represents all areas of pensions provision and is totally non partisan. “As a professional association, our role is not to make politics, but we are ready to hold discussions with everyone who wants to talk to us.” Andresen has been one busy person with invitations from all the political parties and various interest groups. “We just discuss, the political decisions have to be made elsewhere - we just stay neutral.”
But he spies hopeful shoots of change, such as the development of collective agreement schemes, as part of the negotiated package between workers and employers, where up DM1,200 annually can be put into a deferred compensation plan that can be used for pensions provision purposes. If the employee decides to take the DM1,200 as cash instead of the package, it is subject to income tax and social security contributions. “We are expecting to see big movements in this direction and would strongly encourage such pensions through collective agreements.”
Aba’s structure as an organisation is different to most other countries’ pensions associations, Andresen points out. “Our board of 15 members consists of industry representatives and companies, as well as consultants and insurance companies. Because it is so broadly based, it takes much longer to reach an opinion, but this wide range of views gives us a great amount of credibility when dealing with government or parliament. Our political neutrality is part of system.” With 800 company and institutional members and another 400 individual professionals, Andresen says of his role: “I am really like a moderator or a ringmaster!” So far the banks and Kags have held aloof. “I have invited the banks and their investment association, the BVI, to join.”
On the European front, Aba is generally following the European Federation of Pensions Provision’s approach. “We aim to get across what we want to keep of the German system, such as enabling employers to choose between the four ways of provision. We are supportive of the policy towards more prudent man rules and less regulation regarding our investment policy. But prudent man rules do not mean there are no controls at all.” Aba thinks the equities proportion for Pensionskassen could be increased to perhaps 50% from 30%. “We do not see the German government giving up its system of regulatory controls. But the two approaches will come together.”
Andresen does not consider Germany to be “the mover in European pension developments, but we are open to good future orientated proposals. But no one is interested in organising according to English law.” There is also the issue in his mind of the competition between institutions in Europe. “I think there should be opportunities for German institutions be they book-reserve-systems, support or pension funds, banks, insurance companies Pensionskassen or others. They all perhaps should have an equally favoured position in tax law.”xxxx
Occupational pensions provision is a declining German industry in terms of the numbers of staff employers cover. However, the reduction is gradual, down from 65% to 64% coverage over the past three years among employees in industry.
The situation does not look like reversing, given that the Germans are making a real meal of pension reform. Aba, the Heidelberg-based umbrella body representing the pensions industry, has no doubts as who is to blame. Its chairman Boy-Jurgen Andresen says: “The problem for the 20 years I have been an Aba board member is that each government promises to optimise the pensions framework, but in fact does the opposite - no matter what their political colour.”
Since 97% of companies with over 1,000 employees provide pension benefits, he says: “The focus of the political discussion is how can the small and medium sized enterprises (SMEs)have the same coverage.” The short answer is that it is not at all attractive for them to do so, hence less provision is likely at a time when aruguably there should be more.
One key area is that of defined contribution, the obvious way forward for smaller organisations. “At present under labour law, it is not possible to offer DC,” Andresen points out. As a pensions consultant himself with the Wiesbaden-based Dr.Dr. Heissmann firm, he adds: “Our practice has to find solutions very close to DC. So that if the employer wants to invest 2 or3% of pay into a pension arrangement, the actuary has to calculate a defined benefit pension for that level of contribution.” Aba has formulated proposals to introduce DC plans, compatible with the four established ways of pension provision in Germany. Employers need more flexibility, including the ability to offer hybrid schemes.
There have been lurching moves to reform, as with pension payement adjustments. Under labour legislation, employers have to review pensions in payment and adjust them for cost of living, unless the employer’s profitability has risen at a lesser rate. “To cover this burden, it is not possible to make book reserve provision, as the liability is unclear depending on an uncertain future, so German companies are underfunded in this respect.” Since the beginning of 1999, new legislation frees the employer of any other obligations where they agree to adjust pensions automatically by 1% per annum. “However, this only applies to new pension promises from last year,” he points out. The finance ministry blocked any moves that would allow firms to increase book reserve provisions and reduce the government’s tax take. Aba is pressing to have this “incalculable liability” on employers changed.
One achievement was the ability to buy out small pensions by means of lump sum payments. “Before this change, some companies could never go out of business, but had to continue in existence just to pay pensions.”
The vesting rules, which have long been a cause of head shaking by disbelieving outsiders and a source of friction with the EC, have been a domestic political marathon with Aba’s suggestions for liberalisation running into the brickwall of increasing book reserve provisions. “This will be on the agenda for the foreseeable future. Our position is that if we want mobile labour markets, we do not need to go to zero with vesting rules, but to liberalise to periods of three or five years. However, this must not lead to increased liabilities for employers. They must have the opportunity to compensate legally by reducing benefits and more liberal tax laws.”
The constant message back from the government is that any interference with the tax base will be resisted, but Andresen does not think this stance is viable. “The pressures on the government to liberalise the tax rules is extremely strong, not least because overall labour costs in Germany are so high.” Firstly, the methods of pension provision have different tax implications, with Pensionskassen and direct insurance having a tax on contribution as well as on the resultant pension. “A blue collar worker may pay 15% income tax, but 23% on his pension plan contribution, which does not encourage pension plan provision.”
He hopes that now since the government has manipulated its tax reforms, the occupational pension reforms can follow. Nearly everyone agrees contributions and accumulations should be tax free and pension withdrawals taxed. “The government is reflecting on this, but fears it will mean billions less in tax income.” Also, the government is waiting for a supreme court tax ruling on a civil servant who is paying full tax on his pension and claims this is discriminatory compared with social security pensions taxed at a lower rate. “No one knows when this ruling will come.” But timing is becoming crucial, as the government has only this year to formulate its pension proposals since it will need next year to legislate for them, he points out.
Recent years have seen a discussion about whether Germany should have a pension fund structure and, if so, what form this could take. This debate kicked off in 1995 with the research by Deustche Bank, which some feel was not an entirely unbiased source since asset management groups would be the main beneficiaries of such funds.
But Andresen believes |the airing of this topic
was highly beneficial. “It opened the eyes of many companies and consultants too, perhaps. It meant looking not just at different types of schemes, but of funding methods. Since an increase from 6% to 7% in the returns achieved per annum can reduce dramatically the overall cost of pensions in the long-term.” There have been a number of proposals, but in his view the government has not really focussed on this issue.
“Aba’s position is that we do have to modernise and our proposal is to change the law for support funds and develop these in the direction of a pension fund. While there is no agreement as to what constitutes a pension fund, we think plans should provide an annuity, death coverage for dependants and provide for disability.” These three aspects are covered in the social security system and it is only when these three are guaranteed that the state is free of risk, he says. “My own belief is that at least two if not all of these risks have to be covered somehow. Perhaps, there could be a lump sum up to the time of pension, when an annuity can be purchased on a collective basis. We have to be very open minded as to the way retirement income plans provide these benefits.”
With the social security system being re-evaluated, perhaps a consensus is emerging that a more mixed system is required, with 60 to 70% coming from pay-as-you-go and 30 to 40% being funded.
The debate about funding has gone in different directions, with the government chasing the idea of making third pillar pensions mandatory, but backed off in the face of public outcry. “Then there were ideas that social security itself could make up the second tier of funding, but even the politicians would not trust the politicking that might be involved in such a move.”
Early this year, Aba took the step of initiating a public discussion on having a mandatory occupational pension scheme. “This was not because
we are enthusiastic about manada
Andresen

tory schemes, but if the government was moving in this direction, it would make more sense for it to be at second pillar rather than third pillar level.” The response has been very divided, with employers genrally against the idea, while trade unions are in favour.
But the association is in a very good position to run such a discussion, since it represents all areas of pensions provision and is totally non partisan. “As a professional association, our role is not to make politics, but we are ready to hold discussions with everyone who wants to talk to us.” Andresen has been one busy person with invitations from all the political parties and various interest groups. “We just discuss, the political decisions have to be made elsewhere - we just stay neutral.”
But he spies hopeful shoots of change, such as the development of collective agreement schemes, as part of the negotiated package between workers and employers, where up DM1,200 annually can be put into a deferred compensation plan that can be used for pensions provision purposes. If the employee decides to take the DM1,200 as cash instead of the package, it is subject to income tax and social security contributions. “We are expecting to see big movements in this direction and would strongly encourage such pensions through collective agreements.”
Aba’s structure as an organisation is different to most other countries’ pensions associations, Andresen points out. “Our board of 15 members consists of industry representatives and companies, as well as consultants and insurance companies. Because it is so broadly based, it takes much longer to reach an opinion, but this wide range of views gives us a great amount of credibility when dealing with government or parliament. Our political neutrality is part of system.” With 800 company and institutional members and another 400 individual professionals, Andresen says of his role: “I am really like a moderator or a ringmaster!” So far the banks and Kags have held aloof. “I have invited the banks and their investment association, the BVI, to join.”
On the European front, Aba is generally following the European Federation of Pensions Provision’s approach. “We aim to get across what we want to keep of the German system, such as enabling employers to choose between the four ways of provision. We are supportive of the policy towards more prudent man rules and less regulation regarding our investment policy. But prudent man rules do not mean there are no controls at all.” Aba thinks the equities proportion for Pensionskassen could be increased to perhaps 50% from 30%. “We do not see the German government giving up its system of regulatory controls. But the two approaches will come together.”
Andresen does not consider Germany to be “the mover in European pension developments, but we are open to good future orientated proposals. But no one is interested in organising according to English law.” There is also the issue in his mind of the competition between institutions in Europe. “I think there should be opportunities for German institutions be they book-reserve-systems, support or pension funds, banks, insurance companies Pensionskassen or others. They all perhaps should have an equally favoured position in tax law.”