17. June 2021 By Christopher Wildt
Did the Act to BRSG achieve the desired results?
What lies ahead for company pension schemes?
Examining 2020 trends in company pension schemes reveals that broad market penetration remains elusive. Not only that, but new business actually slumped by just under 18 per cent last year. There has been little movement or growth in company pension schemes over the past years. The penetration rate of company pension schemes in 2019 stood at 53.9 per cent of all employees subject to social insurance contributions. For comparison, this figure was little changed over 2017 (54.6 per cent). And despite all efforts and policy measures, there is no indication that the enactment of the Act to Strengthen Occupational Pensions (BRSG) has done anything to expand market penetration.
What are some of the key measures that came out of the BRSG and what impact will they have in the future of occupational pension schemes if the desired effects fail to materialise?
To answer this question, we’ll take a look at key passages of the BRSG. One of the main points of the legislation is the introduction of an employer’s contribution totalling 15 percent of the deferred compensation or employee-funded company pension. The law mandates that employers accrue the tax and social security benefits which form part of an employee’s pay package to their company pension by way of an employer contribution to the company pension scheme. This grant has applied to all new employees since 2019 and will also be compulsory for all existing contracts from January 2022. The ‘German Life Insurance in Numbers 2020’ (Die deutsche Lebensversicherung in Zahlen 2020) report, published by the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft, GDV), reveals a clear increase in the contributions paid into occupational pension schemes. Seeing as penetration rates remain stagnant, the increase in contributions is largely attributable to more funds flowing in from existing contracts. The employer contribution has had no measurable impact on the penetration rates of occupational pension schemes, something that the act sought to achieve.
Another component of the legislation provides support to low-income earners. That’s because the Act to Strengthen Occupational Pensions is part of an effort by policymakers to find new ways to assist this target demographic. The subsidy is intended to encourage company pension schemes to prevent old-age poverty and provide further financial protection to supplement the statutory pension. The term ‘low-income earner’ applies to persons in active employment with a gross monthly income of up to €2,575 as of 2020. The basic principle is to create benefits and incentives for employers. Employers should provide an incentive for employees to save for their future retirement through company pension schemes. Unlike the employer contribution, however, the penetration rate among the target demographic has not witnessed any noticeable increase despite funding provided from the employers’ side. Only a slight increase can be observed among large employers with at least 500 employees. In the case of small and medium-sized firms, the incentives have so far failed to have any effect.
Let us now take a look at the social partner model (Sozialpartnermodell). This model creates a new path into the company pension scheme: a defined contribution plan without the financial burden of a defined benefit plan. This offers greater flexibility when it comes to product and contract design in the entitlement phase. Pension insurance providers have quickly recognised the potential here and have been quick to make suitable products available, allowing the first social partner models such as Rentenwerk and the Vorsorge für Vertragsabschluss initiative to be quickly rolled out. Despite extensive discussions between pension providers and trades unions along with the introduction of flexible products, final approval to go ahead has not yet been given.
Finally, we’ll take a look at the increase in the maximum tax-free contribution. As of 1 January 2020, eight per cent is the maximum tax-free contribution. It should be noted that the increase of four per cent refers solely to the tax incentive. Under labour law and for social security contributions, the existing four per cent rate will remain. This measure also failed to achieve the desired goal of increasing penetration rates. Similar to the employer contribution, an increase in the volume of contributions was primarily attributable to existing contracts. Unfortunately, this measure has not addressed the issue of small to medium-sized enterprises in any meaningful way.
While the BRSG has created new opportunities for pension insurance providers to generate added sales and provided incentives for employers and consumers alike, the BRSG has failed to deliver the desired results or gain broad traction. In addition to the challenges related to Covid-19 in both 2020 and 2021, the following reasons are given for this in the employer and pension provider survey (January 2021) conducted by the Federal Ministry of Labour and Social Affairs: lack of demand from employees, the high costs for employers, the added administrative workload and exceedingly high fluctuation. In short, it is not yet possible to take full advantage of the many incentives on offer due to the complicated, costly and bureaucratic conditions that prevail.
What will be the reaction to the current situation and the failure of the BRSG measures to deliver?
The following statement was issued in a report from the Commission on a Stable Intergenerational Contract (Kommission Verlässlicher Generationsvertrag) (March 2020) by the Federal Ministry of Labour and Social Affairs: ‘The Commission feels it necessary to have as many employees as possible covered by supplementary pension schemes. If this goal is not achieved by 2025, existing policy tools will be updated and further measures explored. By then, the federal government should work to prepare recommendations to allow future decisions to be made without delay.’
A number of the recommendations and plans for their rapid adoption have already been revised and incorporated in the BRSG. The measures being considered include a retroactive increase in the low-income threshold and a higher employer contribution. Taking a closer look at the core components of the BRSG, we made the determination that small changes were also achieved across the board by making adjustments on the fly. One possible reason for this could be a failure to consider the results of the employer survey.
Unless action is taken by pension providers, employers and the government to provide online options, further changes can be expected from 2025. In the report published by the Federal Ministry of Labour and Social Affairs, the measure to establish a nationwide opt-out policy is one of the options still under consideration.
In addition, a specialist article focused on the insurance industry that takes a closer look at core elements of the BRSG will be available at the end of June. This outlines the digital options available for the targeted adoption of legislative measures along with suitable recommendations.
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