The German government introduced an occupational pension reform proposal aimed at making the existing voluntary occupational pension model more flexible and expanding workforce participation by strengthening the social partner model, among other changes.
The draft Second Act to Strengthen Company Pensions and to Amend Other Laws (the “Draft Act”) was published by the Federal Ministry of Labour and Social Affairs on 27 June 2024 and a government draft bill revising the proposal was adopted by the cabinet 18 September 2024. It will now work through the legislative process and be submitted to the Bundesrat for approval. The legislation is not expected to be passed until early 2025. Read detailed analysis of the Draft Act from Funk Gruppe here: Important changes for retirement provision (opens a new window).
Key details
The most relevant changes introduced by the Draft Act are as follows:
Social Partner Model
One of the main goals of the Draft Act is to enable third-party companies—those not currently bound by an industry collective agreement—to participate in the “pure defined contribution” plan model currently reserved to companies participating in the Social Partner Model (Sozialpartnermodell, SPM). This should expand access to smaller employers not bound by any specific collective agreement. Their participation in the SPM defined contribution retirement is subject to final approval of the SPM managing parties and may require contribution toward the SPM’s operating costs.
Automatic participation with opt-out
Employers will be allowed to establish auto-enrolled deferred compensation plans provided the employer contribution is at least 20% of the employee deferral, the employees can opt-out, and the plan is based on an agreement with the company’s elected works council or staff council. (Automatic participation will not be available to companies that do not have an elected works or staff council.) Currently, automatic participation is only possible for companies under a collective agreement and the minimum employer contribution is 15% of the employee deferral. In all other cases, only opt-in deferral arrangements are permitted.
Subsidy for lower income earners
The maximum government subsidy amount of occupational pension contributions for lower income earners earner is expected to increase and will be indexed with the social security contribution ceiling.
Severance Pay
The Draft Act simplifies the termination of occupational pension plans processes by increasing the exiting severance pay on pension entitlements from 1% to 2% of the monthly reference amount in accordance with Section 18 of Social Code Book Four (SGB IV). Subject the employee agreement, the severance payment may be paid by the employer directly towards the statutory federal pension scheme.
Pension payment modalities
Currently, pension funds (Pensionfonds) are only allowed to pay out pension benefits as a lump sum or an annuity. The Draft Act would allow pension funds to pay out benefits in installments.
Early retirement requests
The Draft Act enables an early pay out of the occupational pension benefits for early claimants who are receiving a partial state retirement pension instead of a full state pension as is currently the case.
Lockton comment
Employers should monitor the legislative process to ensure proper compliance the ongoing pension reform legislation. Employers may start preparing for the upcoming changes by reviewing their existing voluntary occupational pension plans (if any), considering the pros and cons of an automatic participation model, or whether they would consider participating in an SPM plan should that option become available to them.
Written in collaboration with
Laura Kahl
l.kahl@funk-gruppe.de (opens a new window) Funk Vorsorgeberatung GmbH