A good one and a half years of the Company Pension Strengthening Act: Already in operation or still to be strengthened – is the pure defined contribution already alive?
By Susanne Jungblut (KPMG)
The Company Pension Strengthening Act has been in force since January 1, 2018. One of the centerpieces of the law is the introduction of a pure defined contribution plan, which is intended to relieve the employer of all liability risks beyond the payment of contributions. After almost one and a half years, are there any pure contribution commitments based on collective agreements for the social partner model?
Reminder: What is behind a pure defined contribution plan?
The Company Pension Strengthening Act (Betriebsrentenstärkungsgesetz – BRSG) contains a whole series of innovations aimed at strengthening company pension schemes. One of the most important aspects is the introduction of a pure defined contribution plan. Previously, the German Occupational Pensions Act (Betriebsrentengesetz) only covered defined contribution plans (boLZ) and defined contribution plans with minimum benefits (BZML) in addition to defined benefit plans. In the case of both a boLZ and a BZML, the employer is liable for a (minimum) benefit defined in advance, which is essentially derived from the contributions made. This guaranteed benefit was identified as a significant barrier to the expansion of occupational pensions. In addition, the underlying guarantee – especially in the low-interest environment – significantly restricts the investment strategy and thus also the achievable return.
For these reasons, the BRSG introduced the option of a pure defined contribution plan, in which there are no minimum or guaranteed benefits from the employer or the implementing institution. However, an employer cannot implement such a pledge on its own. Rather, it requires a basis in a collective agreement, i.e. it must be agreed by the collective bargaining parties and implemented via a joint body of the collective bargaining parties.
Are there already pure defined contribution plans on the market?
In the collective bargaining negotiations and agreements of last year and – to date – also this year, the pure defined contribution plan has not played any role. In the metal industry, it was agreed that there would be an exchange of views on the possible content of a pure defined contribution plan before the next round of collective bargaining in 2020. Initially, it was assumed that an agreement on a new supply system might be reached before this date, but at the moment it does not look like this will happen.
On the part of the companies, interest in the introduction of a pure defined contribution plan seems to be rather restrained. For the most part, the DAX30 companies see themselves as well positioned with their current old-world bAVs. Smaller companies either already have what they consider to be a satisfactory occupational pension scheme or are simply waiting to see what the collective bargaining parties will agree.
Since the BRSG came into force, there have been a number of specialist conferences at which stakeholders and companies have been asked what they think of the pure defined contribution plan and what is currently happening on their side. Also, some surveys were conducted on the subject. Our overall impression is that silence largely prevails at present. It is not yet possible to make a reliable assessment of how the market and the collective bargaining partners will move with regard to pure defined contribution plans. In February of this year, the BMAS invited the collective bargaining partners to a meeting in Berlin to discuss the reasons for the hesitant implementation of the pure defined contribution plan. So, to put it cautiously, there is some expectation of policy here. In expert circles, it is feared – and almost expected – that some kind of mandatory occupational pension scheme or state-directed pension fund will emerge unless the social partners meet this political expectation.
The most movement is almost on the part of potential suppliers. Here, there are already syndicate solutions of the insurance industry as well as cooperations between insurers and investment houses, which (want to) offer corresponding unit-linked solutions. In addition, some large pension funds have set up suitable settlement associations for pure defined contribution plans.
Against this background, the news a few weeks ago that the conclusion of the first defined contribution plan was imminent hit “like a bomb”. Ver.di reported that a corresponding (in-house) collective agreement in the insurance industry was about to be concluded and that there were also concrete talks in a company in the aviation sector. Recent statements by ver.di, however, seem to put the brakes on this announcement again.
Conclusion: We will probably have to wait a while longer for the first pure defined contribution plan. Individual employers who are interested in a new-world occupational pension scheme therefore initially have their hands tied. But the old world of occupational pension schemes also offers solutions that are attractive to employees and involve minimal risk for companies. There is therefore no valid reason to wait before introducing or restructuring an occupational pension scheme – especially not against the backdrop of the increasingly apparent shortage of skilled workers and the increasingly important aspect of employer attractiveness in this context.
