GERMANY – The government has confirmed plans to have insolvency protection for corporate pensions financed via a new multi-billion euro fund, instead of the current pay-as-you-go (PAYG) system.

Employers are obliged under German law to insure corporate pensions. For those using book reserves (or Direktzusage in German), pensions are insured by the Pension-Sicherungs-Verein (PSV). The PSV finances the insurance with contributions from the employers – a PAYG system.

But a record number of corporate insolvencies in Germany in recent years has led to a dramatic increase in these contributions on the employers. In 2005, for example, contributions from the employers totalled €1.2bn in 2005, up 36% from €882m in 2004.

Moreover, there are currently around 170,000 employees who have rights to €2.2bn worth of corporate pensions even though their firms have gone bankrupt.

To relieve the financial pressure, the federal cabinet will tomorrow approve a draft law permitting the PSV to switch to a capital-based system from PAYG.

A spokesman for the German labour and social affairs ministry, which wrote the law, said a new fund would be created into which employers would pay for a period 15 years.

He did not provide further detail, noting that the ministry would put out a press release tomorrow after the cabinet’s approval of the new fund.

The government’s move comes after the PSV said last November that it planned to shift from PAYG to a capital-backed system. The Cologne-based insurance association represents 55,000 employers with 8.5m employees.

These employers also hold around two-thirds of the €366bn in German occupational pension assets.

According to the Financial Times Deutschland, the employers support PSV’s shift from PAYG to a capital-backed system.

Without sourcing the information, the FTD said employers hoped that in the long term, returns from the new fund would enable the PSV to reduce their contributions.