GERMANY - The government has sent a strong signal that it will axe a social tax exemption for defined contribution schemes, which the German pensions industry feels is crucial to further spread of the second-pillar in the country.

The social tax exemption in question was created by the Riester reforms of 2001. It is to expire at the end of 2008 unless the government decides to prolong it. The government had previously said it would officially decide the fate of the exemption next spring.

But in a new report, a copy of which was obtained by IPE, the ministry for labour and social affairs said flatly: "Corporate pensions will continue to be attractive even without the social tax exemption. It is therefore right that the exemption expire at the end of 2008."

To justify the move, the ministry said that if the exemption were retained, the government would continue to face a tax shortfall of more than €2bn annually. This, in turn, might prompt further hikes in contributions to health and pension insurance, the ministry said in the report.

German occupational pensions association aba has long argued that, since it took effect in January 2002, the exemption has helped to ensure a high rate of penetration for corporate pensions. Currently, around 60% of Germany's 30m employees have some type of corporate pension coverage.

Moreover, aba feels that if the exemption is axed, the second pillar will not reach those employees which most need them.

"As we have said time and again, the exemption must be retained. Otherwise, employees - especially those on lower incomes - will lose a key incentive to save for retirement on the corporate level," Klaus Stiefermann, aba's managing director, told IPE.

Last spring, aba chairman Boy-Jürgen Andresen also said in this context: "Why is it considered politically sensible to recklessly endanger the further development of corporate pensions? The answer is €300m in annual revenue that the exemption represents." The €300m figure was aba's estimate then.

According to Andresen, even if the revenue might help the government, Germany's structural problems would not be solved. "At the same time, however, the damage to corporate pensions would be considerable," he said.

Contacted by IPE, a spokesman for the labour and social affairs ministry in Berlin acknowledged that "the tendency is towards not prolonging the exemption".

"However, the minister (Franz Müntefering) has said that a final decision on the exemption will be made in early 2007," he added.

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