The transition to defined contribution (DC) plans by German companies is almost complete, with 97% of the firms now offering that option to its members, up from 93% in 2021, according to the occupational pension index Deutscher bAV-Index for 2024 published by WTW.
Only 3% of the 210 companies analysed in the WTW’s study are sticking to defined benefit (DB) plans, but this number is likely to continue to decline in the next few years, as the new form of pension promises that are introduced are all contribution-based, WTW added.
The study highlights that, in parallel to the transition to DC plans, companies use capital market models (insurance or fund-based) for such plans, meaning that return opportunities and interest rate risks are shouldered by employees. Insurance-based plans (58%) are popular particularly among small and medium-sized companies.
Insurers have reacted in a low interest rate environment by introducing capital market-oriented pension products, WTW noted.
The study also disclosed that 21% of companies in Germany now use fund-based plans for occupational pensions, up from 15% in 2021 – an increase driven mainly by improved standards for those types of company pensions, it said.
Fund-based pension plans were predominant in larger companies, but now are increasingly an option for medium-sized companies. Fund-based pensions lead to good lifelong benefits without damaging the “logic” behind DC plans, according to WTW. Only 18% use a DC system with a fixed interest rate, and the trend continues to decline.
“Companies are now focusing on optimising their company pension systems, In this way, they can ensure long-term, predictable and valuable benefits in their interests, and in the interest of employees,” said Johannes Heiniz, senior director retirement at WTW.
Contribution rates in DC plans vary depending on the industry.
“When measuring their overall compensation packages, companies must take a close look at what is considered market standard for their industry. Contribution rates in sectors such as pharmaceuticals and chemicals are traditionally relatively high, while other sectors, such as construction and trade, have comparatively low [contribution] rates,” Heiniz added.
Among the different ways to offer company pensions, direct promises (Direktzusagen) are still the preferred option by German companies (61%), increasingly in combination with another external vehicle (6%), followed by support funds (Unterstützungskassen), a type of occupational pension vehicle offering tax advantages on contributions.
Direct insurance, another way to offer occupational pensions in Germany, is particularly widespread among smaller companies (12%), while Pensionskassen represent only 2% of the market, according to WTW.
In addition to separate deferred compensation options (often through direct insurance), the majority of companies (80%) also offer a deferred compensation option integrated into matching models with employers’ contributions, WTW said.
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