The Occupational Pension Landscape in Germany - Last updated 19 August 2021
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The Occupational Pension Landscape in Germany Last updated 19 August 2021
Overview ▪ Occupational pensions in the overall system ▪ History of occupational pensions in Germany ▪ Labour law: the pension promise ▪ Five vehicles to deliver occupational pensions ▪ Occupational pensions in numbers ▪ Information on occupational pensions ▪ Insolvency protection ▪ Occupational pensions in the EU ▪ Advantages and Challenges © aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.
Occupational pensions in the overall system
1st pillar: State 2nd pillar: 3rd pillar: Personal
Pension Occupational pension Pension
▪ mandatory for all employees ▪ Voluntary or by collective ▪ Voluntary
who are subject to social agreement ▪ Encouraged through
insurance contributions ▪ With exceptions funded financial incentives
▪ PAYG ▪ EET taxation / incentives (Riester-Rente)
Retirement provision
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.▪ The concept of an employer sponsored pension
fund goes back to the 16th century (miners). In
the 17th century pension funds that covered
clerics, teachers and public servants developed.
▪ One of the most famous actuarial valuations was
History of performed by Carl Friedrich Gauss in 1845 for the
Professors‘ Widows and Orphans of the University
occupational of Göttingen.
pensions (1/4) ▪ Early funds offered dependant‘s pensions, sickness
benefits and funeral payments. Many were jointly
administered by employers and members.
▪ 2nd period of proliferation during industrial
revolution – movement away from professional
schemes to company based schemes. Employer
felt „duty of care“ to provide social benefits.
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.▪ One of the earliest industrial funds was founded
in 1812 by Peter Joseph Boch for his porcelain
factory in Luxembourg, later to become the
Villeroy & Boch workers fund.
▪ During the 19th century many banks and
insurance companies set up pension funds prior
History of to the expansion of the industrial sector.
occupational
pensions (2/4) ▪ Precursor to modern day Pensionskassen was
established in 1837 by a Bavarian spinning and
weaving mill.
▪ Similar institutions followed, Krupp (1858),
Siemens (1872), Hoechst (1879), Degussa (1885),
BASF (1887).
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.1974: Betriebsrentengesetz to protect occupational
pensions
“Occupational retirement provision encompasses
all benefits which employers voluntary grant to
their employees under their employment
History of relationships through the five permissible vehicles
occupational (Durchführungswege) for old-age, survivors’ or
pensions (3/4) disability provision.”
(Translated from Law on occupational pensions –
Betriebsrentengesetz - Art. 1)
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.▪ 2002: Altersvermögensgesetz (introduction of
Pensionsfonds, Beitragszusage mit
Mindestleistung, limited EET for Pensionskassen
und Pensionsfonds, Riester incentives)
History of ▪ 2005: Alterseinkünftegesetz (new tax rules /
framework)
occupational
pensions (4/4) ▪ 2018: Betriebsrentenstärkungsgesetz (Law
strengthening occupational pensions – i.a.
introducing Social Partner DC, making the EET
framework more flexible)
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.▪ Traditional DB (defined benefit, salary or career
progression related)
▪ Two types of hybrid promises:
Labour Law: ▪ Contribution oriented DB with an annual
minimum return guarantee (beitragsorientierte
The pension Leistungszusage).
promise (1/3) ▪ Contribution oriented with minimum guarantee
of sum of nominal contributions at retirement
(Beitragszusage mit Mindestleistung)
▪ Regardless of the vehicle used, the employer is
liable for the benefit promised in a traditional DB
or hybrid scheme.
▪ Social Partner DC: defined contribution promises
can be given if the Social Partners are involved in
the governance of the scheme.
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.▪ Contributions can be financed by the
employer or the employee through
salary conversion (Entgeltumwandlung).
Labour Law: ▪ All employees subject to social
insurance contributions in Germany
The pension have a right to an occupational pension
through salary conversion (Riester
promise (2/3) reform 2001).
▪ A pension promise is always given by an
employer (but may be
financed/administered through an
external vehicle).
▪ Contributions can be in „cash“ to an
external vehicle or „notional“ if
employer is using book reserves.
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.▪ Due to tax reasons, lifelong retirement
benefits mainly in pension form, but lump
sum payments are not forbidden.
Labour Law: ▪ The benefit promise may include benefits
The pension payable on old age, death and/or disability. In
specific cases, it may include a temporary
promise (3/3) pension that bridges the gap between
regular early retirement (after age 63) and
normal retirement.
▪ Not allowed are benefits payable in other
events e.g. temporary illness, early
retirement prior to age 62, periods of care
etc.
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.Five vehicles for occupational pensions (1/3)
Under scope of IORP II Directive
All vehicles Pensionskassen Assets segregated from sponsor
are defined
in the Beneficiaries have direct claim
against assets
German Pensionsfonds
Occupational
Pensions Act, Direct Insurance
Under scope of Solvency II Directive
enacted in (Direktversicherung)
1974
(Betriebs- Direct Promise Outside scope of IORP II Directive
rentengesetz, (Direktzusage) Book reserve schemes
BetrAVG) Support Fund Assets not required to be separated
from sponsor
(Unterstützungskasse)
No direct claim against underlying
assets
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.Five vehicles for occupational pensions (2/3)
Pensionskasse Direct Insurance Pensionsfonds Direct Promise Support Fund
(Book Reserves)
Own Funds 4 % of technical risk-based solvency if Pensionsfonds does n.a. none
reserves plus 0,3% of capital requirements not bear risks: almost
risked capital in accordance with none (except
(additional amount Solvency II minimum guarantee
needed in worst- fund of €2.75m)
case-scenario)
if Pensionsfonds does
→ in total ~ 4,5 % of
bear risks: regulation
technical reserves),
similar to
i.e. Solvency I
Pensionskasse
Investment qualitative and qualitative risk-based mainly qualitative none none
Restrictions quantitative investment investment
investment restric- regulation according restrictions
tions (e.g. max. 35% to Solvency II
risky assets)
Underfunding not allowed up to 10% with 10 no funding no minimum funding
years recovery period requirements requirement
(only 5% if fund bears by definition
risk)
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.Five vehicles for occupational pensions (2/3)
Pensionskasse Direct Insurance Pensionsfonds Direct Promise Support Fund
(Book Reserves)
Tax Effective tax effective
Contribution Limits contributions
contributions up to 8% of the annual social security contributions no upper limit for tax
severely limited
ceiling (SSCC) are tax exempt effective allocations
unless fully and
to book reserves
SSCC: € 85,200 EUR in 2021, thus the limit is € 6,816 in 2021 specifically
reinsured; then no
upper limit
Taxation of Benefits
fully taxable (certain plans / amounts still tax-free due to grandfathering provisions);
in detail, there are more differences in the taxation procedures for the vehicles
Social Security
Contributions (SSC) Contributions: Contributions:
- no SSC on contributions of up to 4% of SSCC - basically no SSC
- full SSC on contributions with “Riester”-subsidies - SSC for salary sacrifcice exceeding
- no SSC if contributions fall under former flat-rate taxation 4% of SSCC
(additional requirements in case of salary sacrifice)
Benefits:
Benefits: - benefits subject to SSC, but since 2020
- benefits subject to SSC, but since 2020 an allowance applies (in an allowance applies (in 2021: € 1.911,-
2021: € 1.911,-- p.a.) - p.a.)
- exemption for benefits from “Riester”-subsidised contracts
since 2018
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.Occupational pensions in numbers: the vehicles (1/2) Source: Klein R. (2021): Die Deckungsmittel der betrieblichen Altersversorgung in 2019, in: Betriebliche Altersversorgung, Heft 5/2021, S. 427f. © aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.
Occupational pensions in numbers: membership in millions (2/2) Source: Bundesministerium für Arbeit und Soziales (2019), Trägerbefragung zur Verbreitung der betrieblichen Altersversorgung (BAV 2017), Forschungsbericht 523, S. 64, Tabelle 8-1. Source: Bundesministerium für Arbeit und Soziales (2020): Ergänzender Bericht der Bundesregierung zum Rentenversicherungsbericht2020 gemäß §154 Abs. 2 SGB VI (Alterssicherungsbericht 2020), S. 139, Tab. D.1.1.
Growing information needs regarding occupational
pensions and requirements
▪ For many years, members and beneficiaries had a
Information on right to request information (§4a BetrAVG) – i.e.
information was provided on demand.
occupational
pensions ▪ With the growing importance of occupational
pensions, these rights are supplemented with the
requirement to provide information (without the
member / beneficiary requesting it): IORP II
Directive for Pensionskassen and Pensionsfonds,
transposed through the VAG and subsequent
Verordnungen (also applicable to
Direktversicherungen)
▪ A Digital Pension Overview is currently being
developed (see next two slides)A project years in the making …. ▪ Since 2005: Start of annual Pension Benefit Statements issued by the Statutory Public Pension Insurance to all insured persons (first pillar; after an introduction period of three years) ▪ 2005-2019: Coordinated efforts within GVG (a national stakeholder association for social security) for better cross-pillar information (tracking, projections) Recommendations published in 2019 ▪ 2019: Publication of a study by AON / University of Ulm-Study: “Conceptual foundations for a cross-pillar pension information system” (commissioned by the Federal Ministry of Labour and Social Affairs (BMAS) ▪ July 2020 – December 2020: Legislative process © aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V 17
The “Digital Pension Overview Act” and its timeframe ▪ January 2021: Promulgation in the Federal law gazette ▪ Since February 2021: Preparation of implementing regulation and technical details with stakeholder participation (all 3 pillars, consumer advocates) ❖ Five Advisory Boards (w/o consumer advocates) ❖ One Steering Committee (with limited veto powers) ▪ December 2022: Start of first operational phase (with voluntary participants) ▪ December 2022: Start of an evaluation period ▪ December 2023: Regular operation (with adjustments) on a voluntary basis ▪ After December 2023 / tbd: Mandatory participation in regular operation © aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V 18
Insolvency Protection: PSVaG
▪ Pensions-Sicherungs-Verein (PSVaG): ▪ collects annual levy from sponsoring
Established 1974, extended to cover employers proportionate to the basis of
Luxemburg employers in 2002. assessment, basically the reserve for
vested benefits and pensions in
▪ Provides benefits in case of insolvency
of the sponsoring employer.
payment
basis of assessment for levy:
▪ Participating employers in 2020: 95,000
▪ Insurable cases in 2020: 503 ▪ for direct promises: pension provision
in the tax books
▪ Covers all vested promises (subject to
ceiling) in book reserve, support fund,
Pensionsfonds and since 2021 majority ▪ for other financing vehicles: simplified
formula with comparable liability level;
of Pensionskassen schemes. for pensions financed via IORP this basis
▪ Ceiling is pension up to €9,870 p.m.
(Western States) and €9,345 p.m.
of assessment is reduced to 20%
(Eastern States) in 2021. ▪ long-term level of levy is about 0.3% of
basis of assessment
▪ Payment of pensions outsourced to a
consortium of 49 life insurers.
(0.28% expected for 2021; 0.42% actual
for 2020)
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.Occupational pensions in the EU: legislation,
institutions and issues
Financial
EU Pension
Transaction
Capital Markets Tracking
Tax
Union
ECB
Regulationon
Minimum harmonisation to
Withholding give Member States leeway to
Statistical
Tax adjust prudential
Reporting
requirements to national
social and labour law
European
Report of the High IORP II Directive
Addressing e.g. cross-border
System of
Level Expert Group
activities, quantitative Financial
on Pensions requirements, governance, Supervision –
provision of information EIOPA: Stress
tests &
Sustainable Finance Common
Regulations (taxonomy, Framework
benchmarks, disclosure) Shareholder
Rights Directive
© aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V.Employees are protected by social and labour law, which
stipulates amongst other things that the employer has a legal
duty to make sure the pension promise is met.
Advantages of Occupational pensions:
occupational ▪ are often organised by the social partners (collective
agreements can achieve broad coverage)
pensions for ▪ cover biometric risks such as longevity, death and/or
disability
employees ▪ spread the risk: in collective schemes, members share the
investment risk
▪ diversify: individuals not solely rely on the public PAYG
system for their old age income
▪ are good value for money: employers can offer in-house
solutions or negotiate collective agreements, which are
often cheaper than individual contracts used for a
personal pension▪ Current low interest rate environment
▪ Increasing regulatory requirements – e.g.
Challenges for increasing reporting requirements after the
financial crisis, review of the IORP Directive
occupational ▪ Coverage in Germany (2019): 53,9% (18.2m) of
pensions employees who pay social insurance
contributions are entitled to an occupational
pension – this could be increased
▪ Generally, occupational pensions mirror the
labour market – this means e.g. lower
occupational pensions for women (because of
lower wages and less time spent in paid
employment)
▪ More flexible labour markets / increasing
mobility - both domestically and internationallyThank you very much for your interest in German occupational pensions! aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V. Wilhelmstraße 138 10963 Berlin Telefon 030.338 58 11-0 E-Mail info@aba-online.de www.aba-online.de © aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.V. | ??. Monat 20?? oder Referent
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