Product innovations in German life insurance
‘A company pension is the oldest, most important and most cost-effective form of supplementary pension in old age,’ emphasised Andrea Nahles (SPD) last year while she was still the head of the German Federal Ministry of Labour and Social Affairs. However, in 2016, only nearly 60 per cent of employees in Germany had a company pension, and this percentage has been stagnant for years. To change this, a reform of the company pension system was initiated in the previous legislative period. Following long negotiations, expert politicians from the CDU and SPD agreed on a new regulation. The German Occupational Pensions Act (BRSG), which was approved in June 2017 by the Bundesrat, came into effect in January 2018. The goal is to make company pensions more attractive through bonuses for low earners, an expansion of the tax benefits and, above all, through the elimination of employer liability.
The new regulation for company pensions is controversial. The biggest sticking point is the core of the law: the prohibition of guarantees. For the first time in the history of company pensions, legislators are backing away from guarantees. Some experts call it a ‘historical revolution’; others call it a ‘gambling pension’. While former Labour Minister Nahles, as well as trade unions and employer associations, considers the elimination of guarantees inevitable in times of continued low interest rates, the German Insurance Association (GDV) initially came out against this. But now the GDV expects the law to bring positive momentum. ‘The BRSG offers a few new opportunities that should be used by employers and employees,’ states Peter Shwark in an online article on the GDV website in February 2018. Schwark is a member of the GDV management and is responsible for the areas of pensions and retirement plans.
The BRSG allows employers and unions operating under a ‘social partner’ model to structure company pension plans purely as defined contribution plans through a collective bargaining agreement. So employers no longer have to guarantee a minimum benefit and the pension providers may no longer offer any guaranteed benefit. Employer liability has been eliminated. The act also introduced a specific support model for low earners and simplifies and improves the tax allowances for company pension plans and Riester pensions. In addition to the guarantee prohibition and the purely defined contribution plans, there were initially disagreements over the elimination of employer liability and the tariff exclusivity.
msg life is sure that company pensions will become more attractive through the new regulations. Initial reactions already indicate that a new dynamic is developing in the industry. The law could be the impetus for positive long-term development of company pensions in Germany.
However, there are also indications that, due to a lack of information, the full potential of company pensions is not being tapped. Around two-thirds of employees have not yet heard of the BRSG, as a study by consulting firm Aon Hewitt shows. ‘The information deficits play a decisive role in inhibiting the development of company pensions,’ says Aon Hewitt CEO Fred Marchlewski about the study according to a press release from 13 March 2018. After all, nearly 45 per cent of employees describe the government bonuses as an interesting new development from the BRSG; among employers, this figure is 56 per cent. According to Marchlewski, the high level of interest indicates that changes are coming. ‘The BRSG very well could achieve its goal of better providing for low earners.’
The design of the new pension benefits as purely defined contribution plans presents both the social partners as well as the providers with professional and technical challenges. The interplay of collective and individual accounts, dealing with hedging instruments (explicit and implicit buffers) and the mechanics of pension adjustments have to be professionally determined by the social partners and technically implemented by the providers.
msg life is working intensively on this along with other topics related to the new regulation of company pensions and their implementation. Additionally, we are represented in the working groups of relevant associations that deal with defined contribution plans. We work in close concert with our customers that are interested in defined contribution plans to create efficient future-proof solutions together with them.
Discuss the latest developments concerning the German Occupational Pensions Act (BRSG) with msg life experts.
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