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  2. DEFINED CONTRIBUTION
December 26, 2016 12:00 AM

Germany gearing up for new mandatory DC plan

Proposal borrows much from collective hybrid system of Netherlands

Paulina Pielichata
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    Heribert Karch said independent management of risk is 'the biggest advantage' of the reform.

    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.

    Support for low-income workers

    The draft law also ensures support for low-income workers, offering employers of low-wage workers a tax incentive to contribute to their employees' retirement plans.

    Reiner Schwinger, head of the Northern Europe region at Willis Towers Watson, based in Stuttgart, agreed with Mr. Stiefermann. “The draft law ... includes many good aspects, however, many (also) don't go far enough ...”

    “Companies need to adopt some restrictions too and therefore need to work closely with union representatives to come to an agreement,” he added.

    According to the Association for Occupational Pensions, the draft “leaves a lot of leeway to the social partners (employers and unions) and it is therefore not yet clear how defined contribution schemes will evolve.”

    The Frankfurt-based German Investment Funds Association was more upbeat about the proposal. The association “has long and emphatically fought for both” defined contribution plans and the right of workers to opt out if they so choose, the association said in an e-mail. “The BVI considers these measures as milestones.”

    Mr. Karch said the negotiation allowed in the reform is a good alternative to a mandatory system where the terms are uniform to all plans.

    Final approval of the draft bill will be the responsibility of the German Bundestag, or parliament.

    The Federal Ministry for Labor and Social Affairs and the Federal Ministry of Finance proposed the draft law in early November. It was approved by the Cabinet last week and now goes to the Bundestag.

    A spokesman for the Ministry of Labor and Social Affairs, said the bill won't take effect before midsummer at the earliest. The government hopes to have it fully operational by Jan. 1, 2018.

    “The time between now and the bill implementation by July next year is tight but sufficient to conclude the reform,” concluded Mr. Karch. n

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