Hanne Borst, Head of Retirement Germany – WTW
1. Your presentation on the gender pension gap showed that there is a huge need to catch up. The conclusion is that one in five women over the age of 65 is at risk of poverty. What can society do about this? What can and should be done, particularly in occupational pension schemes?
The gender pension gap describes the difference in retirement income between men and women and is also referred to as the "gender pension gap". According to the latest figures from the Federal Statistical Office, the gender pension gap in Germany is a substantial 39.4%. It should be noted that the gender pension gap refers to the individual person and not to the household as an economic unit. It is therefore not possible to draw direct conclusions about the actual pension situation of women.
Nevertheless, women often choose occupations that are lower-paid to begin with, work fewer hours per week on average and are more likely to be employed in (mini-)jobs that are not subject to social security contributions. For example, according to the results of the micro-census, in 2021, 47.4% of women in employment between the ages of 15 and 64 will be working part-time, compared with only 10.6% of men of the same age. Women also take more frequent and longer breaks from work - usually to take on caring responsibilities, especially looking after their children or caring for their parents.
According to the Federal Statistical Office, one in five women is therefore at risk of poverty. Social changes are needed to counteract this. This starts with a fair division of care work between partners. There is also an urgent need for much more reliable childcare facilities. According to the Bertelsmann Foundation, there is currently a shortage of more than 400,000 childcare places in Germany.
Occupational pension schemes can also make a valuable contribution in this area. Many women are unaware of their difficult situation. By providing financial education, employers can help to clarify this. Thanks to modern digital solutions, there are already many ways in which this can be done today. In addition, the subsidy for low-income earners under Section 100c of the German Income Tax Act (EStG) should be revised. This is a subsidy for employers who provide their employees with an employer-funded occupational pension scheme. Employers whose contributions meet the required conditions receive a subsidy amounting to 30% of the contributions paid. Since introducing § 100 EStG, the legislator has raised the monthly income limits once, to reach € 2,575 in 2020. Regular wage and salary increases mean that employees no longer qualify for the subsidy. To counteract this, the legislator should raise the limit again in the future and make it more dynamic, for example in line with a dynamic social security contribution, in order to further increase the attractiveness of employer-funded occupational pension schemes, especially for low-income earners.
2. During the ABA conference, the BVV presented the first Social Partner Model within the financial sector, which is designed to implement a pure defined contribution scheme. Is this the future?
The Social Partner Model (SPM) was launched in 2018 as part of the Occupational Pensions Strengthening Act (BRSG), with the aim of increasing the prevalence of occupational pension schemes. Against the backdrop of a decline in the level of benefits in the statutory pension insurance system, the nationwide expansion of supplementary pension provision is essential for retirement provision in Germany.
A Social Partner Model is based on a purely defined contribution plan. This is certainly a novelty for Germany, even though a purely defined contribution plan has been the international standard for many years. An SPM enables a consistent link to the capital market. It is also an innovative, fund-based pension concept. At the same time, eliminating employer liability allows German companies to achieve previously unattainable financial predictability.
However, a SPM requires the mandatory and permanent involvement of the relevant social partners in the implementation and management of the model. The introduction of a pure defined contribution scheme therefore requires not only that a company is generally bound by a collective agreement, but also that the relevant collective bargaining partners first agree on a collective agreement to this effect. The agreements that have hitherto been concluded at company level alone are not sufficient to introduce a purely defined-contribution scheme.
For these and other reasons, the Social Partner Model is currently taking off rather slowly. Where the journey will take us cannot yet be predicted with certainty. At the aba's annual conference, the BMAS and BMF held out the prospect of various improvements as part of the BRSG 2.
However, it should be noted that traditional occupational pension provision outside the SPM is a very efficient and generally attractive form of old-age provision. It has been tried and tested in practice for many years. Unfortunately, this often tends to get forgotten when the SPM is discussed.
3. This Social Partner Model with a purely defined contribution commitment puts a stronger focus on the investment policy as such. Compared to insurance companies, for example, the funds offered tend to be much more opportunity-oriented. How does this fit with the long-term need for occupational pension security?
Occupational pension schemes are characterized, among other things, by the following two main features: The investment horizons are generally long and it is possible to hedge the risks by means of a collective investment scheme. Fluctuations in the investment of capital can be smoothed out much more easily in a collective than in an individual investment strategy.
In addition, it is possible to take a more opportunistic approach to investing with a long investment horizon. This makes it possible to ride out dry spells on the capital markets, as we saw in 2022.
For some years now, the insurance industry has also been offering a wide range of tariffs with initially reduced guarantees in occupational pension schemes. These are part of defined contribution plans. Initial guarantees of 60-90% of contributions are often offered. Any surpluses can be accumulated during the term of the contract and are guaranteed from then on. Securities-linked pension commitments are also becoming increasingly common. These usually depend on the performance of the funds invested.
Opportunistic investment is therefore nothing new in occupational pension schemes and, in view of the long-term investment horizon, is not in conflict with the beneficiaries' need for security. What is new about the SPM is the elimination of the employer's liability, which is not particularly high in practice, also due to the long investment horizon.
4. The German BRSG2 aims to strengthen occupational pension schemes and, above all, make them more attractive. What changes do you think are necessary to ensure that occupational pension schemes remain fit for the future?
Occupational pension schemes are already attractive and sustainable. Around 21 million entitlements and almost EUR 700 billion in assets (aba statistics, 2023) speak for themselves. Occupational pension schemes are efficient and profitable, and offer the opportunity to hedge risks collectively. Studies conducted by WTW regularly show that occupational pensions are also effective in retaining employees. A company pension scheme has become an important differentiating factor in times of skilled labor shortages.
So far, however, occupational pension provision has been particularly widespread in the larger companies. In companies with more than 1,000 employees, 88% have a company pension scheme, according to the latest BMAS research report. The situation is somewhat different in smaller companies. In companies with fewer than 100 employees, only around 45% have a company pension scheme.
The aim of the BRSG 2 is to increase the rate of penetration of occupational pension schemes, in particular in small and medium-sized enterprises and among people with a lower income. To achieve this, it will be necessary to change the so-called "Social Partner Model" in particular.
This is a regrettable situation, as the traditional occupational pension system already offers attractive options, such as the existing subsidy for low-income earners under Section 100c of the German Income Tax Act (EStG) or direct insurance, which is very simple to administrate. However, when a company provides a company pension, it is making a very long-term commitment. There are very few ways to change a promise that has been made, including transferring assets from one pension fund to another. The possibilities for subsidizing the low paid also urgently need to be expanded (see question 1). In addition, there are still too many legal uncertainties that need to be clarified as a matter of urgency. This applies in particular to the treatment of guarantees. The rules have not yet been clarified or are too restrictive.
5. You are also a member of the Actuaries' Working Group on pensioner companies. You gave an insight into your work during the conference. What do you consider to be the key issues in the area of pensioner companies?
Challenging economic conditions, rising inflation and increasing demands on corporate governance mean that those responsible for managing company pension obligations continue to focus intensively on the possibilities of "de-risking". In addition to the options already established in the market, such as plan design, CTAs, reinsurance policies or pension funds, the focus is increasingly shifting to structures known as "pensioner companies", which allow obligations to be taken off the balance sheet.
However, the difficulties are inherent in the details - the requirements for the financial funding of a pensioner company are based on a BAG ruling from 2008 and can no longer be applied 1:1 in current legal and economic conditions. The Association of Mathematical Experts has therefore set up a working group on "pensioner companies". One of the issues addressed by this group is the appropriate basis for determining the level of provisions / funding. At present, some uncertainty remains among interested companies as to how to determine the amount of the funding and the potential liability risks associated with it. More clarity on this point would be beneficial, as a pension company is a very attractive de-risking option overall and is increasingly in demand in the market.