For German employees who want to maintain their accustomed standard of living in retirement, company pension plans are often indispensable. For employers, on the other hand, the long-term security of pension plans is a constant challenge, especially in times of low interest rates. That’s why around 50% of German companies are currently planning to change their company pension arrangements in the course of the next year. Their main aims are to harmonize pension plans and reduce financial risks. At the same time, companies are attaching increasing importance to occupational pension schemes for employee recruitment and retention. These are the findings of Lurse’s 2021 Occupational Pension Schemes Survey.

The survey covers open plans from a 55 large and medium-sized companies from all major industries in Germany. These companies use different plans for employer- and employee-financed occupational pension schemes, depending on whether they are intended for employees covered by collective agreements or supplementary arrangements offered by the employer. The survey covers a total of 111 pension plans, of which 61 are financed purely by employers and 70 – mandatory or voluntary – by employees. In 29 cases, these are matching contribution models, where the employer’s contribution depends on the level of employee contributions.

Defined contribution plans with minimum benefit guarantee lose importance

The vast majority (93%) of the participating companies have open defined contribution pension plans. That said, the number of defined contribution plans with guaranteed minimum benefits (that is, including full contribution preservation) is declining. Since Lurse’s 2018 survey, none of the companies surveyed has introduced a pension plan with full contribution preservation. Many of the current defined contribution pension products in the market calculate the ultimate pension benefit based on a 70-90% contribution guarantee. Thus, these defined contribution pension plans offer participants a greater opportunity to benefit from investment returns.

Funded plans give reason to expect higher performance

Defined contribution plans are structured as either unfunded or funded plans. In the case of unfunded plans, the contribution is directly converted into a pension. An average guaranteed interest rate of 1.2% was determined for these plans. For funded plans, this figure is 0.9% on average. More than half of all funded plans (57%) provide for a minimum interest rate of 0%. This is therefore essentially a matter of maintaining contributions. For funded plans with a minimum interest rate above 0%, this averages 2% (a reduction from the 2018 survey position of 3%). In the long term, survey participants expect a surplus participation (including guaranteed interest) of 2.7% on average for modular plans. Expectations for the average return on funded plans are significantly higher at 3.4%.

Companies reduce guaranteed and minimum interest rates in occupational pension plans

More than half (55%) of all companies in the survey have made changes to their pension plans in the past three to five years, of which 63% have reduced the guaranteed and minimum interest rates.

50% of the companies also announced adjustments to their pension commitments for 2022. Most of the respondents (60%) want to harmonize their pension landscape and reduce risks, especially in terms of guarantees and interest rates. These results show that German companies are keeping a close eye on their pension arrangements and always scrutinizing them critically.

Employer-financed pension schemes not enough to close the pension gap

Lurse’s Pension Survey calculated the average benefit level of the various employer-financed pension schemes for four employee groups: Clerical, Professional, Management, Top Executive. On average, the entry pension ranges from 4.8% for clerical staff to 7.9% for top executives of the last gross income. Retirement benefits funded through deferred compensation are added. The results clearly show that employer-financed occupational pension schemes do not contribute significantly to closing the pension gap in old age. Benefits would have to be more than doubled for employees to be well covered in old age. One way to address this challenge is to introduce matching plans. Deferred compensation offers combined with automatic enrolment of employees into pension plans are also essential.

Matching plans have taken root and are doubling employee participation

The proportion of companies using matching plans has remained stable at 44% since the Lurse’s 2018 survey. A matching plan includes mixed financing from employer and employee contributions. It doubles the employee participation rate compared to an employee-only funded occupational pension plan. 63% of eligible employees convert pay through a matching plan. Three-quarters of companies with such a plan combine it with a purely employer-financed component, a base contribution that is independent of the employee contribution. In 78% of the schemes, employees can convert income components in excess of the maximum subsidized pay to pension benefit. Matching plans are bringing employee retirement provision forward and are one of the occupational pension models with a future.

Legislation leads to increasing administrative burden for occupational pension plans

In the study, 53% of the companies surveyed stated that the administrative burden in the occupational pension system had increased significantly in the last five years. As reasons, 86% cite new legal framework conditions in company pension law, 60% greater employee information requirements, and 55% an increased number of interfaces with internal and external departments. These figures show, among other things: The Company Pension Strengthening Act, the increasing information requirements vis-à-vis employees, BaFin, EIOPA, the PSV contribution expansion and the pension equalization law are placing an administrative and financial burden on companies.

Companies increasingly recognize digitalization potential in occupational pension administration

However, the digitization and automation of occupational pension processes is also making progress. Two-thirds of the companies surveyed already use a digital platform to manage their company pension systems. But only 28% do so completely digitally via employee and employer portals. 32% use an employee portal exclusively. As many as 20% say they are planning to introduce digital administration software. Another result of the survey: the key driver in the digitization process is the establishment of an employee portal that provides employees with comprehensive information about the company pension. The survey results clearly show that the digitization of occupational pension administration is progressing and gaining in importance in companies.

Occupational pensions gain importance in German companies

One encouraging message from the survey is that employers attach growing importance to occupational pensions – despite the increased administrative burden. For 67% of the companies surveyed, the company pension is an important additional benefit alongside cash compensation. 41% believe that its importance as an instrument for employee recruitment and retention will continue to increase significantly.