One of the most significant changes to have occurred in the last year in Germany was the proposed cut of the interest guarantee offered by some Pensionskassen from 3.25% to 2.75% at the beginning of next year. Many Pensionskassen have struggled to come anywhere close to their interest guarantees and many of the smaller ones still offer the old limit of 3.5%.
“Legislators have reacted to this by lowering the guarantee. Small Pensionskassen aren’t as affected as much as the large, deregulated funds who will have to lower their interest guarantees for future contracts,” says Ernst Schmandt, head of the international department at consultant Buck Heissmann.
In practice there is little change for the consumer if the Pensionskasse guarantees 2.75%, as opposed to 3.25%, while achieving the same returns as it is able to top up its dividends. Given the poor state of Germany’s economy, however, this is quite a significant move, he says.
Changes to legislation in 2001 have also affected the role of the employer in the past couple of years. Says Schmandt: “Companies now realise that due to a change in wording it is clear that the Pensionskasse, as well as Pensionfonds are now the instrument of the employer and if the Pensionskasse fails to deliver, then the employer has to jump in and intervene.”
Take-up of the private Riester-Rente pensions remains sluggish though due to the weak economy and complaints of product complexity. Only 9% of the German population is contributing to a Riester-Rente, although one German in two said they would if their financial situation were to improve.
Germany’s Institute for Retirement Provision says talk of further reform is putting potential investors off. Complexity remains an issue. According to the Deutsche Gesellschaften für Hauswirtschaft, around 80% of application forms are filled in incorrectly. Critics of the Riester products concede that they are picking up following the government’s recognition that they are over-regulated and need reforming. New legislation is now expected in the autumn.
Hans Eichel’s announcement that the real value of state benefits will have to fall in the future ought to spur Germans into buying the private pensions. Eight million Germans are also due a shock following the announcement by the Social Security agency that it is recalculating annual benefits statements as they have been using overoptimistic figures for forecasting pensions on retirement.
Bert Rürup, the man commissioned by the German government to look into pension reform, has suggested Riester pensions products ought to be made compulsory if they don’t take off within the next two years.
While the state pension system and third pillar Riester-Rente systems are in flux, the second pillar is showing signs of stability, and occupational schemes are gradually attracting more members. A report by the ministry for health and social security says occupational pensions are undergoing a revival and that 10m workers now have access to an occupational pension scheme. At the end of March it was estimated that 42% of all employees in the private sector had access to an occupational pension scheme, compared to just 29% in April 2001.
There was considerable activity on the consulting side in Germany last year. Mercer Investment Consulting announced the launch of a new investment consulting practice in Germany with the hiring of two consultants from Towers Perrin.
The consultant firm Heubeck and the software company FJA are merging and planning to offer IT services to the country’s pension and insurance industries. Swiss-based consultant Complementa is also teaming up with the German funds research firm FondsConsult to produce a new investment consultant FondsConsult Institutional. Mercer Human Resource Consulting also announced earlier this year that it is set to acquire KPMG Deutsche-Treuhand-Gesellschaft’s actuarial services division, adding 70 of KPMG’s pensions and significantly bolstering its German presence.
As for the European pensions directive, praise from locals is relatively muted. “On the financial side there is a local market but at the macro level, tax and labour laws are still applied locally. You still have the issue that a UK pension fund can offer financial services to a German employee but the German employee has to treat it according to German tax laws,” says Schmandt at Buck Heissmann.
“The pension market is affected by tax and labour laws and there is little evidence to suggest that countries are going to give ground on their tax laws,” he adds.