Recently, all pillars of the German pension system have seen major changes. The state pension, for example, has seen a reduction of the replacement rate of average net income down to 67%, and employees have been given the new legal right to defer compensation through their occupatioanl pension schemes.
Under deferred compensation schemes, employees can defer a part of their current salary in order to receive it later on as a pension after the age of 60.
According to legal regulations, there is no way for an employee to receive this pension before the age of 60, unless they become incapacitated.
Despite any public discussion about prolonging working life in order to have a big enough workforce or in order to refinance the state pension scheme, employees in most cases simply don’t want to work until age 65 or even 60.
Therefore, because retirement earlier than 65 means reductions to the sponsored state pension and many companies, early retirement programmes are closed for economic reasons, it is clear that all recent activity on the pension front will not bring the end, but will give a new impetus to schemes that allow a type of ‘prefinanced early retirement’.
A still very innovative approach to this challenge is the so-called ‘Zeit-Wertpapier’, which was brought to market a couple of years ago. Zeit-Wertpapier (ZWP) is a savings scheme that gives its participants a claim to paid release from work. It was first developed by the German motor group Volkswagen and then brought to market by our company.
ZWP schemes are arranged on a voluntary basis and can be arranged either by time or money input. This means that either the equivalent of the employees’ working hours or directly his salary is partly transferred to specially developed mutual funds.
Seven funds were set up for seven age groups, each covering a five-year span. For the youngest ages they start with a total equity allocation. With each age-band the bond content is increased.
According to German law the contributions to the funds are done on a gross salary basis. The balances have to be protected against the employers‘ insolvency.
Being invested on the capital market the contributions grow over a period of 10, 20 or even more years, which should be at greater rate than salaries develop over time, so that employees should get more ‘paid time’ than originally invested.
Having collected enough savings within ZWP scheme, the employee aged at least 55 is entitled to a special form of ‘retirement before retirement’, which means they are still under contract but do not have to work. Their salary is paid from the part of the mutual fund which was sourced by their contributions.
Still being an employee, regular taxes and contributions to the German social security are to be paid, but the state pension will not be reduced because of early payments.
When the employees ‘deposit’, which at this stage is invested on a more secured basis, is paid off, the actual retirement takes place.
Now the employee will be eligible for his full state pension and any earnings coming from occupational plans.
Although they are not pension schemes, Zeit-Wertpapier schemes not only have a place, but fit perfectly into the new scenario of German pension regulations.
Brigitte Rudolf is a pension consultant at Pension Consult, part of the Hypovereinsbank group in Munich