Any employee joining BMW’s pension fund in Germany this year will be signed up for a new defined contribution pension plan into which they can opt-out on a monthly basis via the company’s intranet.

To eliminate the longevity risk in its on-book pensions promise – the so-called Direktzusage – BMW has also switched from paying out a lifelong pension to paying instalments over 20 years.

Retirees can withdraw up to 30% of their accrued pension assets on retirement. The rest is then calculated to last for 20 years of payout and continues to be invested.

Speaking at the Handelsblatt conference in Berlin, Wolfgang Degel, head of the retirement competence centre at BMW, said: “A standard adjustment of 1% per year is assumed in the plan, but any return on the investments above this 1% increases the pension assets and extends the payout phase.”

The company is paying a set amount in basis contribution to the pension scheme, and any contribution made by employees is matched in full.

The assets will be invested in Fidelity target funds according to a life-cycle-model, Degel said.

People retiring 20 years from now will be allocated 100% to equity funds with the exposure decreasing to almost zero on retirement.

The pension plan is backed by a CTA and insured against insolvency, an “absolutely necessity” with DC plans, according to Degel.

“The deal is, BMW no longer has new lifelong pension payouts on its balance sheet, and, in turn, the accrued assets can be passed on to one’s heirs,” he said.

The company also guarantees 1.75% in minimum return on the pension assets, which is fixed and Degel “expects to outperform”. If not, the company will pay the difference, he said.

He added: “I am a fan of guarantees entered into with consideration.”

Degel pointed out that a similar promise has been made since 2001 on the company’s deferred compensation scheme (Entgeldumwandlung), into which employees can transfer part of their salaries without any employer contribution.

In this other scheme, the first entries were made with a 3.25% minimum return promise, the minimum guarantee for life insurers at that time.

“In the meantime, we have a mix of interest rates averaging at around 2.6%,” Degel said.

BMW is currently considering how to transfer some of its existing employees into the new scheme or something similar.

Degel added that setting up an external pension plan such as a Pensionsfonds would not have allowed the inclusion of all employees into the scheme, and that on-book reserves afforded the company “more flexibility”.

“It also is a kind of tradition,” he said. “We have always done Direktzusage, and we think it is the best way.”

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