Defined contribution plans have historically played a small part in the Germany’s occupational pension system. So the reform of the system engineered by former labour minister Walter Riester raised hopes among some companies that Germany might see the introduction of a DC plan design along Anglo-Saxon lines – the German equivalent of the US 401 (k) plan or the UK stakeholder pension.
However, these hopes have not been realised. DC schemes are an option, as they have always been in second pillar occupational pension schemes. But they remain supported by (or shackled to) a minimum guarantee. This means that employers cannot transfer all the investment risk to the employee.
Some blame the continuing dominance of the insurance industry for the absence of a pure DC scheme. Most pensions law is drafted with insurers in mind. And insurers themselves have a vested interest in the continuance of guarantees since most of these are provided by insurance contracts.
However, there is another explanation. The government was not confident that pure DC schemes could provide sufficient funding to close the so-called “pensions gap” that Germany expects.
Klaus Stiefermann, the managing director of the Arbeitsgemeinschaft für betriebliche Altersversorgung (ABA), the German pensions fund association in Heidelberg, explains: “The reason why we didn’t get a DC plan is that the whole Riester reform was launched to fill in the gap which we are expecting in the future in the first pillar state pension plan.
“The government wanted to sponsor plans that will be able to close this gap. For that reason it couldn’t be a DC plan, because you could not be sure that they would really fill the gap. So they ended up sponsoring types of plans that, although they have DC elements, are more or less still DB plans.”
Since the provisions of the Riester reforms, which became law at the beginning of last year, companies can choose from three plan designs. The first is the ‘Leistungszusage’ the defined benefit promise. This is the traditional plan design in Germany and still the most popular.
The second is the ‘Beitragszusage-orientierte’, literally a contribution oriented’ scheme. This was introduced by the pension reform law in 1999. As its name suggests, it is a DC-styled plan rather than a DC plan.
Dirk Popielas, executive director, pensions services group, at Goldman Sachs in Frankfurt explains: “The Beitragszusageorientierte was a reaction to demands from corporate management who wanted to be able to better manage their liabilities on the balance sheet. Instead of defining the benefit, they define the contribution. So you build your pension individually, defined by your contribution amount during a specific year and the years before. In reality you are building a DB scheme slice by slice but the benefit is pre-defined by DC at the first stage.
“At the end of the day, it’s a smart way of managing the impact of a defined benefit scheme on the balance sheet and to lower the dynamics.”
The third pension plan design, the ‘Beitragszusage mit Mindestleistung’ literally the contribution promise with the minimum performance, was introduced last year as part of the Riester reforms. This is a hybrid, a DC plan with a DB can tied to its tail.
In this plan, employers contribute to a fund which invest the contributions. They also guarantee that the eventual pay-out will not be less than the total contributions. In other words, they guarantee the capital, less inflation.
This means that, effectively, a DC plan without a capital guarantee is not possible within the second pillar, says ABA’s Stiefermann. “Without a guarantee this would not be an occupational pension. You can organise this with the help of a company. This is no problem. But it would not fall under our occupational pensions code. This means that you wouldn’t have the chance to make use of positive tax rules and special labour laws which provide real security to an employee.”
There is a price to pay for a guarantee, and that is the investment returns that are possible with a pure DC product. There is also a price to pay in terms of insurance premiums, says Popielas. “At the moment you are paying very high price for these guarantees – a typical insurance contract pays you 3.25%. If employers were able to shift from DB to DC schemes in Pensionskassen and Pensionsfonds the question is why should they?”
Popielas points out that it is possible to design retail DC products sold out of Luxemburg as SICAVs. And some German companies have looked to third pillar private pensions to organise DC plans for their employees. Daimler Chrysler has two third pillar funds for employees, designed to be close to the concept of a DC plan.
However, unlike a guaranteed DC or deferred compensation plan within the second pillar, third pillar plans require employees to pay tax on contributions. Furthermore, the tax changes that accompanied the Riester reforms have been designed to make guaranteed DC plans in the second pillar more attractive.
Since the beginning of last year, employees will not pay tax on employer contributions of up to 4% of the salary ceiling for social security contributions, currently around E2,000 a year. Instead, taxation will be deferred until the benefits are paid.
This tax treatment is available to pension plans funded through a pensionskasse or through the new pensionsfonds. This brings them into line with the preferential tax treatment given to reinsured support funds – a popular vehicel for DC plans – where contributions are tax deductible for the employer and not taxed as income for the employee.
None of these changes in plan design or tax treatment of pensions has produced the funding revolution that providers predicted, with large capital flows and with them, genuine DC products.
Observers says this was inevitable. Current fears of unemployment mean that people wonder whether they can afford to put money into a supplementary pensions. More important a new funded system takes time to bed down.
So calls for further reforms and a pure DC scheme are unhelpful, Popielas at Goldman Sachs suggests. “This is not the time for further changes. There is, at the moment, no 401(k) product in Germany, but I don’t think it is the right approach to push forward and say we need another vehicle. I would really prefer to get the whole system simplified and then cost loads will go down and people will understand what is on offer and begin to buy.”
Stiefermann at ABA agrees: “It’s important in times like now when we have limited money in subsidising these products to really focus on a small number of the right things. For us it’s a question of quality. The fact that we are taking care of the biometric risks – life expectancy, injury and early death of the breadwinner – has become more important because of the decrease in the area of the state organised pensions.
“The government has focused on the idea of safety – the idea that a pension must be a benefit on which you can count. Many employers realise that this is important. For that reason, I do not really see that we can expect big support from the government for pure DC plans.”
So, for the time being, it seems, Germany will stick with its happy compromise of a contributory pension with a capital guarantee.

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