Germany is on the verge of introducing a mandatory defined contribution system after the Ministry of Labor and Social Affairs signaled its intention to implement a new law before general elections in September 2017.
The proposal, created to strengthen retirement coverage for German workers, will introduce an automatic enrollment DC plan for some union workers. Employees will be automatically enrolled in the plans, with contributions and other terms negotiated among employers, employees and unions; employees will have an opt-out provision.
According to industry sources, the proposal draws much from the Dutch collective defined contribution system. In the Netherlands, CDC plans are hybrids, borrowing a bit from the more traditional defined benefit and defined contribution schemes. In these CDC plans, benefits are not fixed but based on contributions and investment performance. The German plans likewise will be contingent upon the performance of contributions made by the employer, without benefit guarantees.
The German proposal, overseen by Minister Andrea Nahles, brings a “pure” defined contribution system to German pensions for the first time. Introduction of defined contribution plans in union contracts gives employers the opportunity to set up new plans under the rules and compels unions and worker associations to be involved. Non-union employers can also implement the DC plans but will have to use the union model.
Sources argue that this system adds a layer of protection to employers, which could be crucial to Germany's current economic environment.
“The ability to establish a risk buffer and risk capital will be dependent on collective agreement, and fortunately not law. This freedom to manage the risk independently is the biggest advantage of the reform,” said Heribert Karch, managing director of MetallRente in Berlin. The metal industry pension fund had $237.6 million in assets at year-end 2015.
Industry executives added that the new system will complement existing arrangements and strengthen the second retirement pillar, voluntary pension savings. “The bill should give credibility” to the voluntary system, said Mr. Karch.
The draft bill was welcomed by the pension industry, which believes it will clarify legal questions and create minimum standards for employers to set auto enrollment goals — “an important step towards a more sustainable pension system in Germany without weakening successful existing ways of delivering occupational pensions,” said Klaus Stiefermann, managing director of the German Association for Occupational Pensions in Berlin, in an interview.
“The new draft law makes it possible for the first time in Germany to give a defined contribution promise,” said Mr. Stiefermann. “The bill will give (employers) the opportunity to significantly strengthen occupational pensions. From experience we know that tariff agreements (union agreements) in the medium term also impact labor relations beyond union membership.”
Mr. Karch agreed. “In occupational pensions at present we do not have a pure defined contribution system, because of the minimum guarantees dependent on performance,” he said. “The Ministry of Labor and Social Affairs has done well to draft a bill ensuring a system without guarantees.”
But some believe retirement efforts overall still fall short. Mr. Stiefermann said automatic enrollment can both increase coverage of workers and contributions, but added although his organization welcomes “the legal clarification” in the context of union contracts “there is no reason not to use automatic enrollment independently of” union contracts.
