Employers: No chance without security-linked pension commitments

The shortage of skilled workers triggered by demographic trends is becoming increasingly severe in many industries and will continue to worsen in the coming years. Job vacancies can no longer be filled on a 1:1 basis. In selected industries, qualified employees can basically choose the company they want to work for. Companies should adapt to this employee market in the future and take the necessary steps to be attractive to young, bright minds.

Recent studies show that for younger applicants (18-35 years old), company pension plans (bAVs) are still an important motive when deciding on an employer. Companies that offer attractive packages secure an edge in the war for talent. Purely employer-financed offers are particularly appealing, as are employee-financed solutions if employers participate with subsidies that go beyond the mandatory contribution.

Understanding the spirit of the times

When designing appropriate offers, it is important to understand the spirit of the times in which young employees live and to know what makes them tick. In recent years, influencers and trading apps have ensured that more and more young people are becoming interested in the stock market and securities. Even in school, children are being gently introduced to securities through playing business games. This increases the willingness to take more risks when investing capital, especially if the aim is to build up capital over the long term, as is the case with company pension plans.

What does this mean now for setting up a new company pension plan?

Companies must take these recent developments into account and offer modern pension plans with various guarantee models that are high-yield and cost-effective. These company pension offers must be communicated in such a way that they can be easily set up and their success can be transparently tracked from anywhere over the entire term. Apps and portal solutions are indispensable, because the beneficiaries are already familiar with their use in other environments.

An attractive securities-linked pension commitment

A security-linked pension commitment is a direct or pension commitment made by employers to their employees and, in combination with a direct insurance policy, is currently probably the most modern form of company pension plan.

The amount of the pension commitment is determined by the value of the capital investment and is therefore basically a pure defined contribution plan (rBz). However, since the rBz is not permitted under the German Occupational Pensions Act, it must be structured as a defined contribution-based benefit plan. This means that the employer must promise a "guaranteed minimum amount." Accordingly, the pension benefit equal to the minimum amount must be granted, even if the value of the securities is not sufficient to cover the guaranteed benefit.

The capital investment is usually pledged or secured via a contractual trust arrangement (CTA). The capital is then considered to be capital reserved for pension purposes and must be netted against the obligation or provision in the balance sheet. If structured appropriately, e.g. with a 100% funding ratio, this means that no provisions need to be recognized in the balance sheet and there is no impact on balance sheet ratios. Only the contribution is recognized as an expense in the income statement. Additional information on pension commitments is provided in the notes to the consolidated financial statements.

At a glance

The advantages of the securities-linked pension commitment are therefore obvious:

• There is no actuarial liability for the commercial balance sheet as long as the securities are not worth less than the guaranteed benefit.
• There is no classic problem for direct commitments with regard to the steadily declining interest rate for the valuation of pension accruals.
• Companies enjoy full freedom in their choice of capital investments and can therefore also opt for high-yield forms of investment (securities).
• It is possible to make mutually agreed changes to the capital investment at a later date, so that the company can respond flexibly to changing conditions.
• There is a potential for high deposits, e.g. from bonus payments, which are nearly tax-free
• There are often lower cost structures than for traditional insurance products
• Pension benefits can be structured individually (one-time payments in five installments, lifelong pension).
• Occupational disability insurance can be covered and combined with direct insurance.

The reasons that currently prevent companies from issuing securities-linked pension commitments are primarily that employers, tax advisors and auditors are generally critical of direct commitments and that the administrative expense is estimated to be higher than for insurance-based implementation paths, such as direct insurance. However, the administrative expense can be reduced to a minimum by using an appropriate system solution with automated business processes. This, combined with portal solutions for employers and employees, as well as virtual custody accounts that can be maintained for each employee, ensure transparent presentation and clear communication and efficient administration.

What employers must do now to implement a securities-linked pension commitment

1. Discuss the issue with your tax advisor or auditor.
2. Clarify the company's personnel policy goals for the company pension plan and the financial parameters.
3. Select a provider to advise you on the implementation. In particular, the design of the commitment and the selection of the investment model must be carefully considered.
4. Involve the works council at an early stage as well as the relevant departments, such as the Group IT, Payroll, Accounting and Tax departments.
5. Specify how the commitment is to be administered. The question you need to answer for yourself is: Does our company have the expertise and a suitable software solution to be able to carry out the administration itself, or does it make more sense to outsource all or part of the administration to an external service provider.
6. Think about how to onboard the administration with data compilation and transfer.
7. Consider what information and communication activities are needed for the implementation.

Modern company pension plans make employers attractive

In order to continue to be an attractive employer in the future, especially for young employees, it is immensely important for companies to begin designing modern pension plans in good time. It is advisable to bring in a specialized consultant right from the start and also to include the administration directly in the planning. In this way, you will be able to arrive at a solution that is attractive to the employer and the employees.

Would you like to learn more about this topic? Feel free to contact our expert, Jens Gustenhoven, Senior Business Developer.