The company pension scheme (bAV) plays an important role in retirement provision in Germany, but is not achieving the desired level of widespread use: so far only around 54 percent of employees use a company pension. There is a need to catch up, particularly among SMEs and low-income earners. The introduction of the social partner model through the First Company Pension Strengthening Act was intended to bring an improvement in 2018, but met with little response. The traffic light government now wants to make targeted adjustments with the Second Company Pension Strengthening Act.
After the cabinet decision, the parliamentary process now follows, in which, among other things, statements from experts and associations are taken into account. Versicherungsbote presents the key points of the reform and explains how they are intended to strengthen company pensions.
Expansion of the social partner model for more employers
The social partner model (SPM), introduced with the first company pension strengthening law of 2018, allows companies bound by collective agreements to introduce a company pension scheme without a classic benefit guarantee. The risk should be transferred to the employee through a “pure contribution commitment” and thus offer employers more financial flexibility. However, the model is only used in a few sectors as it is usually reserved for companies bound by collective agreements and is therefore closed to many small and medium-sized companies (SMEs).
The new draft law envisages making the social partner model accessible to companies without collective bargaining agreements. This expansion could give SMEs the opportunity to support their workforce through a company pension scheme without having to conduct their own, often expensive, collective bargaining. Smaller companies in particular without collective bargaining agreements are often less financially stable and shy away from the additional costs and risks that can be associated with the introduction of a company pension.
In order to address the financial problem, the contribution commitment in the SPM remains guaranteed. Nevertheless, it is expected that the contribution will be subsidized, which should offer SMEs a fair basis without being financially overburdened. Employers who join an existing social partner model could benefit from improved conditions and reduced risk. This creates a kind of “framework solution” and is intended to reduce financial hurdles as SMEs join existing, established models and thus spread the organizational and administrative costs across several companies.
In its statement on the draft law, the GDV nevertheless calls for a clear regulation of the financing structure and points out that the costs for employers must remain fairly calculated and manageable in order to promote widespread use.
Automated salary conversion: flexibility for SMEs and incentives for employees
Another focus of the draft law is on automated deferred compensation, which is intended to be made available to companies without collective bargaining agreements through an opting-out system (although not generally legally mandatory, but as an option at company level). This measure aims to introduce a company pension scheme as standard, whereby employees automatically convert part of their salary to build up a company pension. Anyone who does not wish this can actively object.
Many SMEs currently do not offer company pension schemes because the hurdles without collective bargaining are seen as too high and the costs of additional offers can place a financial burden on companies. Organizational know-how and administrative resources are also often lacking. An opting-out approach could make it easier for SMEs to access company pensions, as company pension schemes are implemented as standard without each company having to develop its own model.
In order to make salary conversion more attractive, the draft law also stipulates that employers must pay at least 20 percent of the converted amount as a subsidy. This is intended to ensure that the company pension scheme is supplemented by solid support from the employer. SMEs in particular would be able to operate more easily at a company level without having to overcome collective bargaining hurdles, and employees could benefit from a flexible pension model.
The GDV welcomes this step and sees it as a decisive incentive that creates “more scope for action”, especially for companies that are not bound by collective bargaining agreements, and could motivate them to introduce the offer of a company pension.
More flexible capital investment rules: More return opportunities for company pensions
A central point of the new draft law is the relaxation of capital investment rules in order to increase the return opportunities in company pension schemes. To date, pension funds and pension funds that manage company pension contributions have been bound to strict, low-risk investment guidelines. These conservative forms of investment were intended to ensure the security of pension entitlements, but they have become increasingly less attractive in recent years, as low interest rates and safe investments often only yield low returns.
The planned change provides that pension funds and pension funds will in future have more freedom to invest in higher-yielding forms of investment such as infrastructure projects (e.g. by increasing the risk capital investment ratio). This is intended to enable higher returns, which increase the profitability of company pensions and make them a more attractive component of retirement provision.
The GDV supports this flexibility, but points out the need to lower the contribution guarantee in order to actually be able to benefit from these higher-yielding investments. Specifically, the association is calling for the gross contribution guarantee to be reduced from 100 to 80 percent in order to give company pension providers more leeway for aggressive investment strategies without fundamentally endangering the security of company pensions. Such a reduction would enable providers to invest in more volatile, but often more profitable, investments.
Digitization of administration: increasing efficiency at the Pension Security Association
Another focus of the “Second Company Pension Strengthening Act” is on modernizing company pension administration through digital processes, especially at the Pension Security Association (PSV). The PSV is a central institution in company pension schemes because it protects employees’ pension rights if a company becomes insolvent. However, to date, many of the PSV’s administrative processes are paper-based, which slows down processing and makes communication between employers and the PSV difficult.
The planned digitalization is intended to make administrative processes more efficient. Contribution notices, benefit statements and applications for insolvency protection should be able to be processed digitally in the future. This modernization of administrative processes is intended to speed up the processing of claims and increase transparency for employers and employees.
The GDV supports this step and emphasizes that the digitalization of administration is an important part of optimizing company pensions. Fast access to information is crucial, particularly with regard to the claims of employees in the event of insolvency, and digital processes could enable companies and insured parties to be informed more quickly about the relevant steps.
Targeted support for low-income earners: adjust and make income limits more dynamic
Another key point of the new law is the support of low-income earners, who often have only limited access to company pension schemes. The current support regulations for low-income earners often have no effect because they are dependent on fixed income limits. Even a small increase in salary can lead to employees exceeding the funding limit and thus losing their entitlement. This problem is seen as one reason why company pension schemes have so far been below average for low earners.
The draft law therefore proposes to link the income limit to the general social security contribution assessment limit. This would allow it to be dynamically adjusted to the development of wages and salaries. This is intended to prevent low earners from losing their right to support due to wage increases, even if their purchasing power has hardly increased.
The GDV sees this measure as a sensible step, but also calls for the funding amounts themselves to be dynamically adjusted in order to compensate for inflation-related losses. This is the only way to ensure noticeable support in the long term, making a company pension scheme attractive even for low earners.
Draft law and statements on the federal website
With these measures, the federal government hopes to increase the spread of company pensions and also better protect population groups that have previously had little access to company pensions. The bill is on the website of the Federal Ministry of Labor and Social Affairs available, as are the statements from the associations.
