Current developments in Germany: Betriebsrentenstärkungsgesetz (Law strengthening occupational pensions)

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1 aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Current developments in Germany: Betriebsrentenstärkungsgesetz (Law strengthening occupational pensions)

2 Overview I. Occupational pensions in Germany a. Key features that will remain unchanged b. Areas where additional options will be introduced c. Coverage: Room for improvement II. The reform 2017 a. Structural innovation b. Tax and social insurance c. Low income individuals III. IV. Where do we go from here? Conclusions aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 2

3 I.a Key features that will remain unchanged (1/3): Definition of occupational pension Occupational retirement provision encompasses benefits which employers grant to their employees as part of their employment relationship for old-age, survivors or disability provision. (Translated from Law on occupational pensions Betriebsrentengesetz - Art. 1) aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 3

4 I.a Key features that will remain unchanged (2/3) Contributions are voluntary for both employers and employees, but some sectors are covered by tariff agreements All employees subject to social insurance contributions have a right to an occupational pension through salary conversion (Riester reform 2001) Contributions can be financed by the employer and / or the employee (through salary conversion - Entgeltumwandlung) aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 4

5 Occupational pension law applies I.a Key features that will remain unchanged (3/3): The five ways of delivering occupational pensions Direct promise Support fund Pensionskasse But: different tax and social contribution rules Pensionsfonds Direct insurance aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 5

6 I.b Areas where additional options will be introduced (1/2): The benefit promise made by the employer The employer plays a crucial role: A benefit promise is always given by an employer (but may be financed /administered through an external vehicle) Regardless of type of vehicle used, the employer is liable for the benefit that has been promised aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 6

7 DB Hybrid Hybrid I.b Areas where additional options will be introduced (2/2): The pension promise - three types Traditional defined benefit Contribution oriented DB with an annual minimum return guarantee Contribution oriented with minimum guarantee of sum of nominal contributions at retirement aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 7

8 I.c Coverage: Room for improvement 18m employees were active members of an occupational pension scheme, that is almost 60% of those employed and subject to social insurance contributions Coverage is particularly low in certain areas: In companies with less than 10 employees, only 28% are active members of an occupational pension scheme About half of those earning less than 1,500 Euro per month neither have an active occupational pension membership nor a Riester plan (personal pension) aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 8

9 II. The reform: Government approach to address these issues Government wants to create new opportunities for the tariff partners to provide occupational pensions which are simple, efficient and stable in terms of cost for employers and meet the needs of employees. Main areas of reform: Structural innovation Tax and social insurance Low income individuals aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 9

10 II.a The reform: Structural innovation Defined Contribution through IORPs and direct insurance Making auto-enrolment legally watertight Structural innovation: new role for the tariff partners Ban on guarantees Can be used by employers with a reference to the relevant tariff agreement aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 10

11 II.b The reform: Tax and social insurance Extending the EET system (increasing the tax free amount from EUR to EUR). Making EET more flexible Cabinet draft Statutory health and long-term care insurance contributions in the pay-out phase (exception: occupational Riester) Discussed, but not included aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 11

12 II.c The reform: Low income individuals Accumulation Incentive for employers of those with up to EUR income (30% of employer contribution, max. 144 EUR p.a.) Allowance for low income pensioners when claiming social assistance (100 EUR plus 30% up to just over 200 EUR) Decumulation aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 12

13 III. Where do we go from here? End of March General election in September Committee hearings in the Bundestag begin Adoption in Bundestag and Bundesrat New law comes into force aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 13

14 IV. Conclusions No mandatory measures, but additional options success of the reform depends to a large extent on the tariff partners This reform likely to be the last effort to strengthen occupational pensions on a voluntary basis Topics for the next Government: provision of pension information (including all three pillars) aba Arbeitsgemeinschaft für betriebliche Altersversorgung e.v. Seite 14