By: HUB’s EB Global Benefits Team

Reforms Have Allowed Employers to Provide Pure DC Pension Plans

After the revolutionary reforms to the German pension system in 2018, large industries such as the chemical and pharmaceutical sectors are taking their first steps to implement pure Defined Contribution (DC) pension plans. These industries are paving the way for sector - wide or company-specific DC pension solutions for companies of all sizes – an important development as many companies are considering offering funded DC arrangements.

Previously, employers could only provide either Defined Benefit (DB) plans or DC plans with a minimum guaranteed benefit. Before the reforms, typically only large and established multinationals offered pension plans due to the long-term liabilities associated with DB and hybrid (DB/DC) programs.

The process involved in setting externally-funded occupational retirement plans in Germany is complex and expensive. Any pension changes require collective agreements involving the employer/employee associations, relevant trade unions, works councils, as well as approval by the Federal Financial Supervisory Authority. Negotiations and agreements with these social partners can take years.

Aside from the chemical and pharmaceutical sectors, other sectors are still in negotiations.

A few large companies have been able to reach similar pension agreements with their company trade unions instead of through industry-wide agreements.

Through pooling of effort and resources from employees and employers through a sector-wide collective agreement, the negotiated pension programs can be cost - efficient to operate and simple to adopt, even for small employers in the sector.

In negotiating pure DC plans, employers should expect unions to raise issues such as:

  • Substantial employer contribution rates reflecting an element of compensation for the loss of a minimum guaranteed benefit.
  • Shared governance of the pure DC plan, particularly the investment function with investment policies that favor social and global causes.
  • Preservation of already existing DB and Cash Balance pension plans.

While enrollment for new employees should be simple, existing employees already participating in DB plans may find the implications of moving into a pure DC plan technically complex, hard to understand, and managing investment risk a daunting proposition.

How it impacts you

  • The new pure DC plan legal framework has allowed multinationals in Germany to limit their liabilities by reducing them only to the payment of contributions.
  • The new DC approach has some limitation on taxation and forms of benefit payment that need to be taken into account.
  • Employee consultation, active communication and investment education are indispensable in the successful implementation of DC plans in Germany, as elsewhere.

Next steps

  • Employers in the pharma, chemical sectors should immediately take steps to review their sector agreement for the possibility of implementing the negotiated pension DC programs.
  • Companies in other sectors should also investigate if their sector has adopted, or is in the process of adopting, pure DC pension initiatives.
  • Large employers may adopt pure DC plans on their own through the collective bargaining process.

If you have any questions, please contact your HUB Advisor. View more updates in our Global Benefits Directory.