Germany Allows True Defined Contribution Pension Plans, Modifies Salary Sacrifice Rules

Transcription

1 Germany Allows True Defined Contribution Pension Plans, Modifies Salary Sacrifice Rules June 2017 Lockton Companies As of 1 January 2018, Germany will, for the first time, For further information or assistance, please contact your Lockton Global Benefits Consultant or allow defined contribution (DC) plans without benefit guarantees. Through the passage of the Workplace Pension Reinforcement Act (Betriebsrentenstärkungsgesetz, or BRSG), Frank Rebenstorff Funk Vorsorgeberatung (Lockton Global Partner) f.rebenstorff@funk-gruppe.de new pure DC plans will be permitted when the fund is Lisa Hardegen operated under a social partnership model by unions and Funk Vorsorgeberatung (Lockton Global Partner) l.hardegen@funk-gruppe.de employers for the benefit of staff covered under a collective bargaining agreement. The new DC plan option will also be limited to three funded pension vehicles direct insurance, Pensionskasse, and Pensionsfonds and will not be possible in the case of support funds and traditional book-reserve plans. L C K T N C M P A N I E S

2 This will be a substantial change from the current framework for employer-provided DC plans, which requires that employers guarantee a minimum investment return or benefit level. This guarantee requirement has long been considered a hindrance to the expansion and adequacy of employer-sponsored pension plans in Germany, and the new law provides a path toward greater flexibility in pension plan design and funding. While the law does not allow employers to establish pure DC plans independent of a collective agreement framework, it does allow collectively bargained plans to open their plans to companies that are not covered by the collective agreement. Details, such as contribution levels, can be delegated under the collectively agreed plan rules to the participating companies. Background Prior to 1 January 2018, all forms of German corporate pension plans (Durchführungswege) have required an employer to guarantee its employees future pension benefits. In contrast to other countries, German DC plans contain minimum benefit guarantees, and such plans are usually funded through corporate pension insurance products and are subject to specific accounting standards. Pension benefits are normally paid as a guaranteed annuity even when the accrual basis is DC. The German government presented parliament with a draft BRSG bill in November 2016 to strengthen occupational pensions. The bill provided for the creation of pure DC plans without traditional benefit guarantees under sectorwide collective bargaining agreements. Instead of guarantees, the negotiating parties would establish pension plans with long-term sustainability and possibly a defined ambition target for pension payouts. This proposal met with considerable debate, objections, and possible derailment, but the Grand Coalition, led by Christian Democrats and Social Democrats, ultimately agreed on a joint path toward new regulations for the occupational retirement provision in Germany. The details were agreed upon at the meeting of the Labor and Social Affairs Committee on 31 May 2017 and were approved by the Bundestag on 1 June 2017 after the second and third readings. The law was approved by the Federal Council on 7 July

3 Key Details 1. Defined contribution plans (social partnership model) Under the new legislation, employers will be able to implement pure DC plans with no minimum benefit or interest guarantees. These new DC plans will be permitted only when the fund is operated by unions and employers and will apply only to staff covered under a collective bargaining agreement. Complementing the Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG), it is now expressly stated in section 22 of the draft ccupational Retirement Provision Act (BetrAVG-E) that insurance companies are not permitted to guarantee a benefit amount for a pure defined contribution plan operated under the social partnership model. As a result, foreign product providers are also bound by the guarantee ban. The new law incorporates the basic idea of collective savings through the social partnership model and is inspired by the flexibility available in Dutch collective defined contribution plans, which are target benefit in nature. In addition to the safeguards already in place, the legislature now wants to strengthen protection in the pension accrual phase in order to reduce the likelihood of having to lower existing pensions. The capital coverage ratio in the pension phase must be at least 110 percent in order to increase pension benefits; at 125 percent, benefits must be increased. In the event that the coverage ratio should fall below 100 percent, pensions would be reduced. Furthermore, the new social partnership model will feature a backup funding buffer. This target buffer will be financed by supplementary contributions from the employer. Current workplace pension plans will continue to exist in companies. The Grand Coalition intends to regulate these so that collective agreement parties take appropriate consideration of the current occupational retirement provision. As a result, contributions agreed through collective agreements may continue to be channeled to any of the existing pension vehicles and different types of legal pension promises, such as defined benefit plans and DC-like plans (defined contribution with minimum benefit promise plans). In this way, the scope of implementation of the occupational retirement provision will include the social partnership model, not exclude it as was feared at the beginning of discussions. Moreover, the act gives employers and employees not bound by collective agreements access to the new social partnership model plans, and it prohibits collective agreement parties from creating unfair barriers to entry for noncovered companies. For example, new pension plans are not allowed to charge legally unsubstantiated fees to companies not bound by collective agreements. 3

4 2. New rules affecting contributions made through salary sacrifice (Entgeltumwandlung) Employers that save on social insurance contributions through salary sacrifice options for employee pension contributions to direct insurance, Pensionskasse, and Pensionsfonds will have to make an additional pension contribution amount to each employee s retirement plan equal to 15 percent of the employee s contribution. This additional contribution amount is immediately vested. The regulation will affect all new plans using the social partnership model from 1 January For non-collectively bargained plans, the employer s obligation to pay the additional contribution amount applies to new salary sacrifice agreements made from 1 January 2019 and to all other existing agreements from 1 January If a collective agreement already contains a provision for employer contributions, it will remain in force even if it is worse for the employee, with the exception of the social partnership model. The act also increases the tax-efficient contribution limit for direct insurance, Pensionskasse, and Pensionsfonds from 4 percent to 8 percent of the in-force social security ceiling. 3. pt-out provisions under collectively agreed plans In addition to the individual opt-out provisions stipulated in the collective agreement, opt-out provisions can be implemented through an employment agreement or service agreement, if the collective agreement permits this. Employers not bound by collective agreements may also apply the individual opt-out provisions of a relevant collective agreement. The new obligations for employers to provide information about opt-out provisions based on collective agreements do not apply to rules established before 2 June

5 4. Support for low-income earners The German government provides tax incentives to employers that provide pension benefits to low-income earners. The new monthly gross income limit for earners to be eligible for assistance contributions (ranging from 240 to 480 per year) will be 2,200 per month. It is important to note that the tax advantage for employers is granted based on the income situation of the employee when the contributions are actually made. 5. Riester pension subsidies The basic allowance for Riester (individual retirement savings accounts) subsidies has been raised by 21 to 175 per annum. If Riester pension contracts are provided within the occupational pension framework, the annuity payment at retirement is free of social security tax (health and long-term care insurance), making Riester contracts more interesting to employers seeking to enhance employee pension benefits. Next Steps The ability to provide pure DC plans in Germany presents employers with a new opportunity to provide retirement benefits to their employees. While the law will allow these plans to be implemented only under the social partnership model, the change is indicative of the ongoing trend moving away from defined benefit and toward DC plans. Employers are encouraged to monitor the forthcoming regulations of the BRSG and review their retirement benefits to determine the impact of the changes and the opportunities newly available to them. Employers should also review their existing salary sacrifice arrangements to ensure compliance with the additional contribution required when employees exchange salary for employer pension contributions. This article contains general information only and does not provide legal, tax, accounting, or other professional advice. No information in this article should be relied upon for any business decision or action, nor should it be construed as a substitute for appropriate professional advice or services Lockton, Inc. All rights reserved. kc:32728 lockton.com 5