It is a political goal of the German government to further strengthen and promote company pension plans. For example, on page 73 of the coalition agreement we find:
"In addition to the statutory pension, both occupational and private pension plans remain important for a good life in old age. We want to strengthen company pension schemes by allowing investment opportunities with higher returns. In addition, the social partner model already launched in the penultimate legislative period with the Company Pension Strengthening Act must now be implemented."
Company Pension Strengthening Act
The Company Pension Strengthening Act (Betriebsrentenstärkungsgesetz) mentioned above was already a first significant step towards giving company pensions more weight and appeal. At the time, the preface to the bill stated:
"Occupational pensions are not yet sufficiently prevalent. Gaps exist, especially in small businesses and among low-income employees. Therefore, further efforts and new methods are necessary to achieve the widest possible prevalence of company pension schemes and, connected with this, a higher level of provision for employees through capital-funded supplementary pensions."
As is well known, the Company Pension Strengthening Act established a new type of commitment in the form of a "clearly defined contribution plan," under which all guaranteed commitments must be dispensed with. Instead, one can rely on capital market forecasts. The prerequisite is a social partner model - i.e. a collective agreement between employers/employers' associations on the one hand and trade unions on the other - for opening the "clearly defined contribution plan". And because the implementation of this type of commitment is only permitted in the form of insurance, i.e. pension funds and life insurance, one of these pension providers still needs to be on board as a product provider.
The First Social Partner Model
For a long time, the social partner model was a "market without demand," as several collaborations between care providers advertised themselves as product providers, but none of these offers had been demanded by a social partner model. But now it has finally been done, the first real social partner model set up by the social partners in the chemical industry (the IGBCE trade union and the BAVC employers' association) has been adopted. Naturally, hopes are pinned on this project as a door-opener for proving the advantages of the clearly defined contribution plan. The first product provider will be R&V's CHEMIE Pensionsfonds AG, and at least one other major pension fund in the chemical industry tariff association will soon offer its customers a similar product.
What does the future hold?
The launch of the clearly defined contribution plan, the very likely spread of this model and the prospect of further possible product innovations pose new challenges for pension providers. The implementation of the clearly defined contribution plan is not trivial. And if a larger market opens up for this type of commitment, as the federal government would like, and a pension provider wants to participate in it, it will probably have to repeatedly put its IT systems, and especially its inventory management systems and their neighboring systems, to the test.
The coalition agreement's promise to "allow investment opportunities with higher returns," in addition to the clearly defined contribution plan, gives rise to speculation about further possible product innovations in the company pension scheme, e.g. a modified contribution plan with a minimum benefit (BZML).
The implementation of the European information requirements in the company pension scheme from January 1, 2020 and, at least for life insurers, the introduction of the new actuarial interest rate of 0.25% from January 1, 2022 have just been completed, and already the next legal requirement has to be mastered with the realization of the digital pension overview (RentÜG). So far, company pension schemes have been spared from Solvency II and PRIIP - for the time being! If, as announced in the coalition agreement, the German government expands the opportunities for access to the capital market for company pension schemes, this could in turn lead to both increased supervisory control analogous to Solvency II and to more detailed information obligations vis-à-vis insured employees analogous to PRIIP.
Even today, regulated pension funds and other pension providers are forced to implement special regulatory measures in their systems (biometric strengthening of reserves, interest-based strengthening of reserves, actuarial interest rate reduction in existing contracts).
The German government's intention to strengthen the company pension scheme is, of course, also an appeal to pension providers to improve customer service, and thus make the company pension scheme more appealing. Employer portals have existed for a long time, employee portals are still rather rare.
Ultimately, company pension providers are also suffering from the long phase of low interest rates and the cost pressure resulting from it. Ensuring profitability requires streamlining processes to the point of complete automation, especially in inventory management and its neighboring systems. For example, it seems not uncommon for employers to report and pay incorrect contributions, in terms of both amount and their "tax color coding" (more on this later). If about 5% of all contribution reports are affected, this would mean 50,000 required contribution corrections per month (!) for one million contracts. This may have to be carried out manually. A fully machine-supported process in this case could save enormous costs.
How can we master the future?
If one identifies a modernization of the inventory management system (including its neighboring systems, if applicable) as necessary, a decision needs to be made between in-house development and the purchase of standard software. But what is standard software in company pension schemes? What specific requirements must a company pension management system meet in order to be considered as a solution to the challenges outlined above? These questions will be answered in Part 2 of this blog post.
