National Report for the FEDERAL REPUBLIC OF GERMANY

Transcription

1 National Report for the FEDERAL REPUBLIC OF GERMANY 1. State of the Profession During the past 2 years the number of 1ACA.members in Germany was reduced from 20 to 19. All members take keen interest in the board's professional work. The members convene twice a year. Our members work together closely on technical issues with the actuarial sub-committee of the German Pensions Institute (ABA) as well as with the German Institute of Pensions-Actuaries (IVS), in which our members play a leading role. The progress being made in the general quality of work being performed in the pensions' sector, not least because of the sucessful training of younger actuaries, is the result of active involvement by many of our members. In the difficult question of professional liability, we have learned that an amendment in the terms of our insurance policy, in the terms of our business conditions or an individual agreement with the client remains unsatisfactory. It seems that only a combination of these measures allows a reasonably acceptable limitation of our professional liability. We are currently negotiating coverage of certain defined risks with insurers.

2 The various co-operations between US and European consulting actuaries entered into with the aim of providing better service for our multinational clients, have not attained significant weight as yet. In the longterm future however, their importance will certainly grow. This was made apparent, for example, during a meeting attended by the writer of this report in February 1988 in Paris, at which French experts discussed the latest state of initial European attempts to harmonize the retirement systems within the European Economic Community. This, as so many other harmonization goals, is fraught with difficulties, as we all can well imagine. 2. General Information During the last two years, the following statistics were recorded in Germany: Average gross earnings increases 3 to 4 % p.a. (with a simultaneous reduction in the working week by 2 to 2.5 % p.a.1 Average cost-of-living increases 0.5 % p.a. The average increase in social security pensions The increase in net take-home pay has not lagged behind increases in gross earnings, primarily because of the reduction in personal income taxes with effect from The increase in net take-home pay has thus significantly exceeded cost-of-living increases. Fixed interest rates have, apart from insignificant fluctuations, remained practically unchanged over the last 2 years. 10-year bonds currently yield about 6.5 %; shorter.term bonds yield significantly less. The real rate of interest - after allowing for cost-of-living increases - remains around 5 to 6 % p.a., the highest level for real rates of interest in the last 20 to 30 years.

3 3. The Social Security System Since its introduction in 1983 the contribution rate to the state medical insurance funds for pensioners reached its maximum rate of 5.9 % of the state pension on July lst, Although there is basic agreement between all experts and politicians of all parties that, in the long term, state pensions should increase in line with net average disposable income rather than with average gross income, the planned increase of 3.1 % as at is again orientated towards the increase in gross national. covered earnings. The purchasing power of the state pension has thus been further enhanced. 4. Unemployment and Pre-Retirement Notwithstanding a strong economic growth unemployment continues to be a very serious problem. The contribution towards unemployment insurance amounts to 4.1 % of covered earnings up to the Social Security Contribution Ceiling (SSCC = DM 72,000.- in 1988). The state must nevertheless continue to grant substantial subsidies to meet the def kit. Various state and private enterprise ihitiatives have not been able to reduce the unemployment rate, which remains at around 9 % of the working population. The only significant effect of the step-wise reduction in the working week, reaching 37 hours per week in some sectors, has been to prevent a further rise in unemployment in the unskilled labour force. The reduction in working hours amongst skilled workers has largely been cosmetic: in practice, the reduction is either compensated for by overtime or not adhered to at all. The 1990's will bring a reduction in the number of job seekers, while simultaneously the number of pensioners is expected to increase. It is hoped that in line with

4 rationalizations the unemployment rate can be reduced, albeit at the rate at which such rationalizations can take place. 5. Company pensions The most important development here has been the enactment of the "Bilanzrichtlinien-Gesetz" (referred to in short as BiRiLiG). It sets new guidelines as to how German companies must prepare their financial statements in future and is a translation into German national law of the 4th, 7th and 8th European Economic Community (EEC) Council Directives into company law. BiRiLiG applies to all fiscal years beginning after December 31st, As is generally known, German company pension plans are usually in the form of direct pension promises - financed internally by book reserves - or in the form of benefit programs financed via support funds. BiRiLiG changes the existing reporting requirements for these financing instruments as follows: - Direct pension promises must be recognised by companies in futureas a balance sheet liability. A transition arrangement allows pension promises made before to be excluded from this rule however: here the recognition remains optional. - For benefit plan arrangements financed via support funds, no mandatory balance sheet recognition is required: thus a stable accrual in the company's income statement is not made mandatory. - In addition, joint-stock ( ie. limited liability) companies are required to disclose any funding deficit in the notes to the accounts whatever the chosen type of pensions vehicle is. This deficit will usually have to be measured by the difference between the present value of accrued liabilities and the assets or the recognised book reserves as the case may be.

5 As yet, no concensus has emerged on the method by which such liabilities are to be measured. The Institute of Accountants is currently preparing a paper that will address this and other related issues in detail. Thus, for example, a differentiation between salary-related and fixed-dm plans may be required in future. Until now, such a differentiation was not permitted for tax purposes; this is expected to remain so in future. However, many firms are gradually becoming aware of the fact that salary related pension plans should be valued more conservatively for for purposes of the financial statement than will be permitted for tax purposes. A number of colleagues have been engaged in work to comply with FAS 87 and have attempted to find sensible answers to a series of questions not dealt with explicitly by the Statement. All consulting actuaries giving advice to German subsidiaries of US-multinationals or to German multinationals seeking a quotation on US stock exchanges have had to develop new computer programs to deal with the complex technical requirements. Since the Statement encompasses not only funded and insured plans, but also book reserved plans, we have all - thankfully - had our work load increased. Nevertheless, would be pleased if an American colleague reading this report could let us have the latest state of affairs regarding questions and answers to FAS 87. Upon a divorce of a married couple, German law provides for equalisation of income after retirement. This means that the party with the higher retirement income must assign parts of his or her benefit to the other. Since new rules apply to company pensions in such cases. In accordance with the extended contractual claim method (Verlangerter schuldrechtlicher Versorgungsausgleichlthe company must grant a reduced pension to the ceding beneficiary (or his new spouse) in addition to some amount to the former spouse. The result of this new legislation is a minimal increase in plan costs with, however, a significant increase in administrative work. German company pension plans, with the exception of those of large corporations, are only getting to grips slowly with the issue of equal treatment for men and women, as required by EEC law. Most such companies still grant

6 pensions without actuarial reduction to females retiring at the age of 60, although labour law requires a widower's pension to be granted if widows also receive such benefits. In contrast, males are still generally required to work to age 65 or 63 with any early retirement benefit only being granted after appropriate actuarial reduction. As consultants we should take care to remind our clients to update their benefit arrangements to bring them into line with legal requirements. In 1986/87 all German insurers changed to new tariff rates on the basis of an interest rate of 3.5 % (previously 3 % p.a.). Inevitably, this has led to an increase in the guaranteed sum assured with a corresponding reduction in the bonus payments. The new tariff rates will take separate account of male and female mortality (this was not always the case in the past), leading thus to separate tariffs for men an women. Different rates for smokers and non-smokers will not be available, however. Ln addition, the German federal insurance supervisory authority has required insurers to improve the terms offered to insured persons on surrender of endowment policies thus further reducing bonus distributions. The insurance industry in Germany still abides by very conservative principles, and continues not to play a dominant role in the area of company pension arrangements. Most topical at present is the treatment..of liabilities in respect of long service awards for tax and financial statement purposes. Although this issue is not directly related to company pension plans as such, we are often asked to perform valuations of these liabilities. Many employers in Germany typically grant cash awards or benefits in kind to their employees after 10, 25 or 40 years of service, since the German Income Tax Code provides for limited amounts to be granted free of personal income taxes at these anniversaries. The highest German tax. court has now ruled that such awards must be charged to income in accordance with the generally accepted accounting principle of uniform.accrual. Companies must therefore recognise such future liabilities in their balance sheets. The internal revenue has also accepted that such book reserve accruals will be treated

7 as tax deductible operating expenses for companies at present. In future, however, the tax deductibility will only be given on condition that employees terminating company service receive a pro-rated proportion of the long service award they would have been entitled to had they stayed on in service. Due to the nature of the benefit this last condition is currently uncommon, since this would defeat the basic purpose of such a benefit. Nevertheless, some employers may amend their benefit rules appropriately to take account of the additional requirements. Here again, we see an additional area of consulting arising for us. Separately from the tax treatment, BiRiLiG requires the mandatory recognition of such liabilities in the commercial balance sheet as from Concerning the valuation basis, a rate of interest of at least 5.5 % is permissable: the valuation method must allow for a "uniform accrual". At the time of writing it was still not clear, what specific valuation method is required and how turnover is to be allowed for if no benefit' is payable upon early termination. Finally, mention should be made of a major income tax reform which has been the subject of discussion in both houses of parliament during recent months. As from 1990 the income tax rates, both corporate and private, are expected to fall significantly, so that income tax revenues will reduce by several billion DM. On the other hand, as was done in the US, certain subsidies are to be reduced or eliminated alltogether. Here the pensions field is also affected. In accordance with the amendments drafted as at mid-january 1988, the following significant changes are expected:.- 'The most wide-spread form of providing company pensions, namely book reserved direct pension promises, is only to be affected in such a manner, that the technical rate of interest for beneficiaries in Berlin is to be increased from 4 % to 5 %. Since the technical rate applicable to Germany in general is 6 %, the existing subsidisation for Berlin is halved. - It is planned that the hitherto tax-free investment income of support fund will be subject to a withholding tax of 10 8, which - as foreseen in the first draft - will not be able to be reclaimed by the

8 tax-exempt funds. - Pension plans that are financed by Pensionskassen or insurance contracts will be affected severly by the new tax law: Firstly, the current flat rate tax on direct insurance premium payments will be increased from 10 % to 15 %. Secondly, a fairly small amount of direct insurance premium (DM 312,- p.a.) that could be paid by the employer on behalf of the employee without attracting any personal income taxes is to be dropped all together. On average the combination of these two measures will probably result in a doubling of the average flat rate taxes currently being paid. In addition, that amount of bonus exceeding the guaranteed 3.5 % p.a. rate of return will be subject to a withholding tax of 10 % which - in line with the treatment already described for support funds - will be a real tax of 10 % to the policy holder; since the withholding taxcannot be used to offset income in the personal income tax return. Similarly, the investment income of Pensionskassen is expected to be subject to the same 10 8 tax already mentioned for support funds. The combination of all the measures further reduces the attractiveness of Pensionskassen in comparison with the other forms of financing occupational pensions. Hopefully we can report during the discussions of the National Reports, that the planned tax restrictions will not be as severe as is currently feared. If this should not be the case, the politicians will have to accept the criticism that such measures undermine employers' trust in a stable development of the fiscal treatment of company pension plans. This in turn may result in a reduction rather than in the continually pronounced political aim of furtheringoccupational pensions. The fact that all these amendments in legislation bring with them an ever increasing amount of work for us consulting actuaries can be of little comfort to us.