By: HUB’s EB Global Benefits Team

What Is It About?

With the collapse of the German government in November 2024, a major pension reform that would have extended occupation pension plan participation has consequently been put on hold. Currently only a little over half of the active workforce is covered by a company pension plan, most of whom work for large employers subject to Collective Bargaining Agreements (CBA).

One of the major changes anticipated is the extension of pure Defined Contribution plans to all companies. The other important change would be to allow companies to establish auto-enrollment pension plans with employees having the ability to opt out. Currently only companies bound by a CBA have these possibilities.

The incoming government is expected to continue with the reform of Germany’s three-pillar pension system. The reforms of occupational pension benefits had cross-party support and should therefore be prioritized this year.

In the meantime, at the start of 2025, the German finance ministry adjusted the maximum actuarial interest rate that insurance companies may use in pension and life insurance calculations, increasing it from 0.25% to 1.0% marking the first such increase in over 30 years.

This rate change may have direct implications for employer-sponsored retirement plans if an occupational pension scheme is funded through insurance contracts with a guaranteed interest rate offered by the insurer. By raising this threshold, German regulators are giving insurers more leeway to offer higher guarantees within retirement products. This change is modest yet meaningful and affects how future pension entitlements are valued in Contribution-Based retirement plans.

Impact on Occupational Pension Plans

Pension plans in Germany take various legal forms, yet regardless of vehicle and financing method, employers are responsible for ensuring benefit security, even in externally funded models. The impact of the higher interest rate will depend on the plan design of the occupational pension scheme:

For insurance-based pension arrangements

For Defined Benefit arrangements, higher actuarial interest rates reduce the contribution to be paid to fund the given pension obligation.

For Contribution-Based pension plans, the guaranteed level for newly concluded policies will rise due to the higher guaranteed interest rate offered.

For book-reserve financing

The adjustment of the maximum actuarial interest rate does not have any direct effect on the value of the pension liability to be recorded in the balance sheet. However, a rising market interest environment could lead to lower pension obligations on the balance sheet over time.

Surplus Distribution & Ancillary Benefits

A higher maximum actuarial interest rate allows insurers to assume a more favorable discount rate when calculating the actuarial reserves they must hold for newly issued policies. The change also indirectly affects the surplus crediting mechanism. The higher the guarantee, the more of the interest must be spent on providing the guarantee, resulting in lower surpluses.

Due to the effect shown above, the premiums for term life and long-term disability contracts will become more cost-effective.

Impact on Companies

  • For insured Defined Benefit schemes, premiums for new pension annuity contracts may decrease as insurers use a higher interest rate to discount future benefits.
  • For Contribution-Based insured pension schemes, the guaranteed benefit levels will rise.
  • Term life and long-term disability insurance policies may see a reduction in premiums offered by the insurers.

Suggested Employer Action

  • Review funding strategies for insured Defined Benefit arrangements to understand how the interest rate adjustment affects premium calculations.
  • Review how this change impacts financial reporting and funding strategies.
  • Engage with providers to reassess benefit levels, expected surplus participation, and new Contribution-Based products they may offer.
  • Inform employees of the change and how a deferred compensation arrangement will support their retirement needs.
  • Monitor the legislative process on the expected pension reform law and the opportunities it brings for companies to enhance the benefit package for their employees.

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