Germany sets new course for occupational pension systems
Just before the end of the last legislative period, the German parliament (Bundestag) has voted for the biggest ever-pursued reform of occupational pension systems. The so-called Act on Strengthening of Occupational Pensions (Betriebsrentenstärkungsgesetz) has been adopted in parliament in June 2017 and is about to enter into force on 1 January 2018.
In light of the financial market crisis and ongoing low interest rates, politicians were faced with the challenge of strengthening occupational pensions in Germany and making them more attractive for both employers and employees. Occupational pensions are – beneath the statutory pension and individual pension provision – the third pillar of the retirement income in Germany. A good mixture of these three pillars is essential in order to ensure an acceptable level of retirement income and will eventually be necessary to prevent pensioners from being dependent on additional social benefits.
Due to the extensive administrative burden of occupational pension systems and high economic risks for employers, occupational pension promises are practically only customary in larger companies. Employees in small companies very often do not have access to such pension plans, especially in small artisanal businesses.
The main aim of the new act is to lower the entry barrier for employers as well as for employees:
First innovation: The implementation of a plain defined contribution plan
When dealing with German occupational pension schemes for the first time, especially for people with an Anglo-American legal background, it is comparatively difficult to understand that there has been no defined contribution plan ("DC-Plan") in Germany thus far. Why should an employer guarantee the interest rate and capital market risk for employees, even if the occupational pension is provided through an external pension fund, was a regularly asked question. The German approach has been rather different for quite a while. As a result, there were only various kinds of defined benefit plans (for example, contribution-orientated DB-plans or DB-plans with defined contribution and guaranteed minimum payout plans) in place.
As of 2018, the Betriebsrentenstärkungsgesetz allows those employers bound by or acting within the scope of a collective agreement, to implement a plain DC-Plan. In doing so, the employer must choose an external pension fund that is controlled by the tariff partners of the collective agreement – which is why this new plan is often referred to as the social partner model (Sozialpartnermodell).
It is very unlikely that these new plans will replace the existing traditional forms of plans provided by the law. Yet these new rules provide interesting options for employers who have been discouraged by the risks of traditional plans.
Second innovation: Opting-Out of employee-financed pension plans
The second innovation of the new law is that employers will now be enabled to select an opting-out form for their pension plans. The idea is that participation in an employee-financed pension plan is mandatory, as long as the employee has not expressly declared that he or she objects to the conversion of part of his or her salary into pension benefits.
As well as the social partner model, opting-out plans will have to be based on a tariff agreement.
These aforementioned two amendments bring with them a number of technical changes to taxation and social contribution aspects, most of which are intended to make pension plans more interesting for employees with little income and for smaller businesses. Unfortunately, there is also a little downside for employers who implemented deferred compensation schemes using a German pension fund, a Pensionskasse or a direct insurance: as of 2019 – and for ongoing conversion agreements as of 2021 – employers will be obliged to grant an additional 15 % to top up the employees' contribution.