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Company pension schemes in German businesses: what is, what comes?

Company pension schemes in German businesses: what is, what comes?

  • Supposedly defined contribution systems are not risk-free for enterprises
  • Companies are increasingly relying on matching systems
  • Protection for employees as well as employee retention and recruiting intended
  • Reduction of costs & risks desired

Frankfurt/Main, February 15, 2016 – How do German medium-sized and large businesses design their corporate pension schemes and what are the trends and developments in company pensions? HR strategy consultancy Lurse took these questions as an opportunity for a special survey on corporate pension schemes where a representative section of the German economy, including companies like Bayer, Evonik, Schaeffler, Software AG and Infineon, revealed the present and intended design of their company pension plans. The key design features of 124 provision plans were analyzed, differentiated by type of financing and by employee groups.

Risk at second glance

94 percent of the participating companies have designed their plan as a defined contribution commitment. With 83 percent, the direct commitment is the most common implementation method among the participating companies, where the company grants its employee benefits from the company pension scheme and establishes provisions for this purpose. In virtually all of these companies, the direct commitment is not completely reinsured or backed by capital and, therefore, biometric and financial risks are not outsourced. 72 percent of the considered pension plans were established in 2005 or earlier, and the life tables as well as the interest rates applied at that time no longer comply with today’s life expectancy respectively the conditions prevailing in the capital markets.

“This means that in more than ¾ of the participating companies, there exist compensation systems which appear to be contribution-oriented, but the contributions payable do not correspond to the actual and long-term expense of the company. A sustainable analysis is essential here to develop modern and employee-attractive systems that against the background of the current low-interest phase reduce risks for the company and secure long-term planning for the employees,” Matthias Edelmann from the Lurse Board of Management points out.

Getting the employee on board

Over 40 percent of the companies already make use of matching plans in which the amount of the employer’s contribution is determined by the amount of the employee’s contribution. Matching plans have the advantage that the employee is more likely to deal with the pension plan – “how much do I have to convert in order to get how much in addition”. Also, the granting of the contribution to a matching plan becomes more transparent as a special employer benefit than it does in merely employer- and/or employee-financed pension commitments. Therefore, companies usually generate distinctly higher participation rates in matching plans than in merely employee-financed pension plans. Thus, the employee participation rate in (voluntary) employee-financed pension plans of the companies is 28 percent in average. Regarding matching plans, the participation of the employees is more than twice as high with an average of 60 percent.

In comparison to a merely employee-financed company pension scheme, matching is especially attractive to employees in the current low-interest phase, because an employer’s matching contribution compensates the low return on the employee’s investment and thus additionally enhances the benefit “company pension scheme” for the employee.

Company pension schemes as an instrument to increase employer attractiveness

Irrespective of the type of financing, the most frequent reasons mentioned for the implementation of company pension plans are the security of employees as well as employee retention/recruitment and the market position. This emphasizes that company pension schemes are increasingly considered an important component of remuneration and human resources policy, which is also confirmed by Infineon as a participant in the survey:

“The company pension scheme at Infineon is an important instrument for our attractiveness as an employer. The results of the Lurse company pension scheme study provide us with a relevant overview of the current plans of the German economy and especially of our competition for this benefit,” Maik Metzdorf, VP Global Head of HR Compensation & Benefits, Infineon Technologies AG, underlines.

Risk reduction desired

Half of the respondent companies plan a change of their company pension scheme. The research results demonstrate that concerning the (re-)design of merely employer-financed pension plans, risk prevention plays a significant role for half of the companies, and for 43 percent of the respondents cost reduction is a crucial point. Both is achieved by designing the pension scheme as defined contribution plan, where there will not emerge any further obligations for the employer than the payment of the amount pledged.

The topic “modern company pension scheme systems” is the focus of the next Lurse Dialog event which will take place on 1 March 2016, in Frankfurt/Main.