Country Panel Presentation: Germany

Transcription

1 Country Panel Presentation: Germany 2016 IGP Regional EMEA Seminar Windsor, May 24-26, 2016 Alexander Rottstädt, Key Account Manager, Gothaer Lebensversicherung AG Moderator: Mark Horbag, Account Executive, IGP This presentation was exclusively prepared for the attendees of the 2016 IGP Regional EMEA Seminar. None of the contents of this presentation may be copied or disclosed to any other party or used for any other purpose than the one mentioned above without IGP's prior written permission. 1

2 Key Topics Background Information Social Security Private Practice Taxation Administration Legislation Country and Company Info & Background 2

3 Background Information Company Info Gothaer Group oldest German mutual insurer, one of Germany s big insurance groups, one of the country s largest mutual insurance associations Gross premium income of more than 4.5 billion More than 4.1 million insured members Invested assets of 28 billion 5,910 employees 140 milion consolidated profit 1.78 billion group equity 1.10 billion investment result More than billion in investments 3

4 Background Information Country Info Total Population: 81.1 mn Age 65+: 21% Age 20-64: 61% Age <20: 18% Economical Situation (2015) Gross domestic product: 3,025.9 bn Economic growth: 1.7% Inflation rate: 0.25 % Export surplus: bn (+6,4%) 3 rd largest exporter in the world Labour Market Persons in employment: ca. 43 mn Rate of registered unemployed: 4.8% Increase in real earnings: 3.0% Others National Budget 2015: again balanced 4

5 Key Topics Background Information Social Security Private Practice Taxation Administration Legislation Summary of Social Security Benefits 5

6 Social Security Benefits Summary Basic Provision Compulsory for employees Funding based on pay-as-you-go system Contributions: split equally between employee and employer Pension benefits Old-age pension Disability pension in the event of full or reduced earning capacity Death benefits for dependants Unemployment insurance scheme Health insurance scheme Nursing care insurance scheme However shrinking benefits raising of the pensionable age to 67 6

7 Social Security Benefits Contributions 2015 Type of Social Security Benefit Employee Employer Social Security Contribution Ceiling West G East G Pension 9.35% 9.35% 74,400 64,800 Unemployment 1.5% 1.5% 74,400 64,800 Health 8.4%* 7.3% 50,850 Long-term Care 1.175% 1.175% 50,850 Total % % *) Including average supplemental premium charged by health insurance provider 7

8 Social Security Benefits Pension Gap Assumptions: Retirement age: years of paying contributions Gross salary per year in % of gross salary 38 % of gross salary 34 % of gross salary Gross pension 2010 Gross pension 2020 Gross pension 2030 Source: Deutsche Rentenversicherung, ifo-berechnungen 8

9 Social Security Benefits Demographic challenge The performance of the Statutory Pension Insurance comes to its limits in a few years 71 pensioners 43 pensioners 100 premium payers premium payers

10 Summary of Social Security Benefits Major Structural Changes Shift of focus from benefit to sustainability contribution Solid contribution level of 20% until 2020 and 22% until 2030 resp. Gradual increase in normal retirement age from age 65 to age 65 + x months for persons born between Age 67 for persons born in 1964 or later Worsening of the eligibility and amount of disability benefits since pension reform in 2000 Employees are required to compensate for their risk of disability and their retirement income, either by employee contributions to a company pension plan or private savings (partly subsidized by a government bonus) 10

11 German Pension System Three Layer System 1st Layer Basic provision: state pension scheme tax-privileged Ruerup-Pension 3rd Layer 2nd Layer Occupational pension schemes: old-age benefits and/or disability benefits and/or surviving dependants benefits Optional private pension benefits: Life insurance contracts or private equity investments so-called tax-privileged Riester-Pension With reductions in social security benefits, German Government has shifted parts of the financial burden of an ageing society onto the companies and the individual 11

12 Key Topics Background Information Social Security Private Practice Taxation Administration Legislation Customary Private Employee Benefits: Type & Level of Benefits / Survey Data / Plan Design / Benchmarking / Trends 12

13 Customary Employee Benefits Schemes Pillar II What is an occupational pension scheme? 1, Employers' Retirement Benefits Law Old-age benefits and/ or Disability benefits and/ or Surviving dependants benefits on the condition of an employment contract 13

14 Customary Employee Benefits Schemes Basics of Employee Benefit Schemes Definition Employee benefits are a commitment of the employer to grant old-age benefits invalidity benefits and / or dependants benefits based on an employeremployee relationship Occupational pension schemes do not provide medical benefits and accident benefits Pension promises in Germany Defined benefit traditional pension promise Contribution oriented defined benefit becoming more and more popular Defined contribution with minimum benefit very often combination of a guaranteed part plus investment in funds with the chance of higher income return 14

15 Customary Employee Benefits Schemes Funding Vehicles for Retirement Benefits (2/2) Funding vehicle Asset Accumulation Funding Regulations Impact on Local Balance Sheet Insolvency Protection Cover* Direct Pension Promise Support Fund internal none yes none / insurance-type guarantees compulsory Direct Insurance Pensionskasse external insurance type guarantees none none (in principal) Pensionsfonds insur. or non-insurance type guarantees compulsory (reduced contribution level) * Pensions Sicherungs Verein: Pension Security Association 15

16 Customary Employee Benefits Schemes Funding Vehicles for Retirement Benefits (1/2) Direct Pension Promise (Direktzusage) The employer commits contractually to pay retirement benefits directly to an employee; usually a reinsurance contract is in force Support Fund (Unterstützungskasse) A support fund is a separate legal entity from the employing company through which employee benefits are financed Direct Insurance (Direktversicherung) A direct insurance is a pension insurance contract between employee, employer and an insurance company Pensionskasse Special type of insurance vehicle providing retirement benefits Pensionsfonds Separate legal entity that was originally set up with the intention of encouraging external pre-funding of pension obligations 16

17 Customary Employee Benefit Schemes Type of Plans Common practice for employers to offer pension plans 90% of employers with 200 or more employees run occupational pension plans (employee and/or employer financed) The number of employees with a company pension in the private sector has in recent years risen from 35% to 48% Expectation: small size companies and start-ups will follow Company pension plans usually provide for normal and early retirement benefit long-term disability benefits survivor s benefits 17

18 Customary Employee Benefits Schemes Example of a Modern Employee Benefit Plan (1) Employee-financed (2) Employer-financed Type of plan Contribution oriented defined benefit plan Matching contribution Contributions 1-4% of salary 1-4% of salary up to SSCC (max. 4% of SSCC) 1,5-6% of salary above SSCC Benefit Old-age pension Contribution oriented: old age Defined benefit: life, disability Benefit amount Old age: based on contribution Life: 1-3x salary Disability: x% of salary Funding vehicle Direct Insurance Reinsured Support Fund Funding Balance sheet impact Fully funded via insurances (classic or unit-linked investment) None SSCC = Social Security Contribution Ceiling 18

19 Customary Employee Benefit Schemes Facts to Keep in Mind Legal entitlement on the part of the employee 1a 1a article 1 of the German employers retirement benefits law (BetrAVG). Per 1/1/2002: legal entitlement of German employees to receive at least an employee-financed occupational pension scheme Maximum possible defined tax- and social insurance-free contribution: 4% of the Social Security Ceiling (SSC) of the Statutory Pension Insurance German Companies are therefore legally obliged to provide their employees with an appropriate occupational benefit scheme 19

20 Customary Employee Benefits Schemes Salary Sacrifice Plan Benefits Contributions derived from salary conversions are tax-free * Contributions derived from salary conversions are social security contributions free Employers and employees mutually profit from a salary sacrifice plan Contribution of the Employee 1, Hereupon Saved Tax Hereupon saved social insurance contributions: Statutory pension insurance 9.350% 112,20 Statutory unemployment insurance 1.500% Statutory health insurance 7.300% Statutory long term care insurance 1.175% Savings per year % Net expenditure: (even though 1,200 will be paid into the pension scheme) ** * max. possible tax- and social ins.-free contribution: 4% of the SSC of the Statutory Pension Insurance ** assumed tax rate = 30% / monthly gross income < SSC 20

21 Customary Employee Benefits Schemes Salary Sacrifice Plans - Employer s View Benefits: Savings on the employers share of the social insurance contributions Savings for the employer: Per year in 5 years in 10 years 1 employee , , employees 1, , , employees 4, , ,

22 Customary Employee Benefits Schemes Challenges: Low Interest Period Net operating margin of federal bonds with a duration of 10 years : 1,94% : 0,07% : 0,54% : 1,01% : 0,64% : 0,25% Source: Deutsche Bundesbank ( ) 22

23 Customary Employee Benefits Schemes Challenges: Guaranteed Interest Rate 4.5% 4.0% 3.5% 3,50% 4,00% 3,25% 3.0% 2.75% 2.5% 2.25% 2.0% 1.75% 1.5% 1,25% 1.0% 0.5% 0.0% July 86 July 94 July 94 June 00 July 00 - Dec. 03 Jan. 04 Dec. 06 Jan. 07 Dec. 11 As of Jan. 12 As of Jan. 15 (*) Obligatory specified by German Federal Financial Supervisory Authority note: illustration as of 1986; guaranteed interest rate before July 1986 = 3,00% 23

24 Customary Employee Benefits Schemes Challenges: Disability Risk 1 in every 4 German workers will experience a period of disability during their working life Approximately 400,000 statutory insured people annually claim for a statutory pension for reduced earning capacity. However, only 40% of the applications are granted Probability of Disability 24

25 Customary Employee Benefits Schemes Challenges: Disability Risk Challenges in the German EB-market: the risk to become incapable to work Very limited benefits of the state in this regard: Incapacity benefits of the German social insurance carrier only provide a basic income without adequate insurance cover, a period of disability poses a serious threat to an individual s financial security Many German product-testing organisations and even the German State recommend that every working individual should have an additional disability coverage! The most favourable way is to establish a corporate disability pension scheme 25

26 Customary Employee Benefits Schemes Health Insurance in Germany 26

27 Customary Employee Benefits Schemes Health Insurance - supplemental health insurance benefits 27

28 Customary Employee Benefits Schemes Health Insurance - supplemental health insurance benefits (example) Supplemental health insurance insurance benefits can be employer and / or employee paid Please see the below example which outlines the benefits of an employer funded supplemental health plan: 28

29 Customary Employee Benefits Schemes Trends Move from defined benefit plans to contribution based schemes remains unchanged There is an ongoing trend toward transfer of pension from book reserve to external funding The appreciation for retirement plans remains unbroken actually increasing in light of talent shortage Global and cross-border considerations are becoming more and more important Cost- and resource-efficiency are top priorities for most companies today pooling 29

30 Key Topics Background Information Social Security Private Practice Taxation Administration Legislation Taxation of benefits (e.g. lump sum versus pensions) / Tax treatment of ER and EE contributions 30

31 Taxation Treatment of Contributions Funding vehicle Income tax Social Security Contribution Direct Pension Promise Support Fund Contributions are tax-free Free of contribution (employer funded); free of contribution up to 4% of SSCC (employee funded) Direct Insurance Pensionskasse Pensionsfonds Contributions are tax-free up to a maximum of 4% of SSCC plus 1,800 p. a. (additional amount under certain conditions) Free of contribution up to up to 4% of SSCC SSCC = Social Security Contribution Ceiling 2014: 71,400 os 31

32 Taxation Treatment of Benefits Funding vehicle Income tax Social Security Contribution Direct Pension Promise Fully taxable acc. to 19, sec. 1, no. 2 Income Tax Law Support Fund Direct Insurance Pensionskasse Fully taxable acc. to 22 no. 5 Income Tax Law Benefits of either statutory or voluntarily insured pensioners are subject of contribution up to SSCC- health/elderly care insurance Pensionsfonds SSCC = Social Security Contribution Ceiling/ health/elderly care insurance/ 2015: os 32

33 Key Topics Background Information Social Security Private Practice Taxation Administration Legislation Legal requirements re. administration of benefit plans: actuarial valuations / communications / involvement of unions/employees 33

34 Administration of Plans Funding vehicle Administration effort Funding regulations Impact on local balance sheet Benefits Provider Direct Pension Promise none yes employer Support Fund none / insurancetype guarantees Support Fund Direct Insurance Pensionskasse insurance type guarantees none Insurance company Pensionskasse Pensionsfonds Insur. or noninsurance type guarantee Pension Fund 34

35 Key Topics Background Information Social Security Private Practice Taxation Administration Legislation Current legislative issues with significant impact on the funding of the benefit plans / How are employer and employees affected? 35

36 Legislation Update Reduction of guaranteed interest rate for new insurance contracts from 1.25 % to 0.9% planned as of 2017 Political discussion about of the implementation of mandatory or optingout company plans for salary conversion Secretary of Labor - Ms Nahles announces a pension reform due to the changes of the economic and demographic environment 36

37 Thank you for your attention! Key Topics We Discussed: Background Information Social Security Private Practice Taxation Administration Legislation Country and Company Info & Background Summary of Social Security Benefits Customary Private Employee Benefits: Type & Level of Benefits / Survey Data / Plan Design / Benchmarking / Trends Taxation of benefits (e.g. lump sum versus pensions) / Tax treatment of ER and EE contributions Legal requirements re. administration of benefit plans: actuarial valuations / communications / involvement of unions/employees Current legislative issues with significant impact on the funding of the benefit plans / How are employer and employees affected? 37

38 Contact Info Alexander Rottstädt Gothaer Lebensversicherung AG Key Account Manager