In September 2001, shortly after both houses of the German parliament had enacted a comprehensive pension reform law, trade unions and employers in two major industries negotiated sectoral collective agreements on private pensions. While the new law merely requests workers to invest a given share of their income in private pension schemes, the new agreements now provide workers with new options to convert part of their income into pension assets. In contrast to several other private pension schemes, the collectively agreed systems exempt workers from the obligation to pay taxes and social security contributions on their pension investment. While both agreements are similar in that they give workers more choices for pension investment, there are also some striking differences in terms of their specific provisions.
After months of negotiations, the social partners in the chemicals and metalworking industries have finally concluded new collective agreements on supplementary pension schemes. Both agreements, which were concluded in September 2001, are based on a pension reform law which was approved by the Federal Council (Bundesrat) (DE0106227N) and Parliament (Bundestag) (DE0101204F) earlier in the year.
At the centre of the law reform is a dual pension scheme, consisting of both state and private pensions. While the state pension system will continue to provide benefits on a 'pay-as-you-go' basis (whereby current pensions are met from the contributions of those currently in employment), the new private pensions system will request employees to pay up to 4% of their gross income into company or other private schemes. While the law leaves it to employees to choose freely the specific form of pension investment, as long as several minimum standards are guaranteed, some trade unions as well as employers are eager to use this opportunity to set up various firm-level or industry-level schemes and offer them to the workforce. Among the first to take advantage of this opportunity were the management and works council at Volkswagen AG, which agreed to set up a company-level pension trust (DE0101200F) and the social partners in the construction industry, which decided to create a joint industry-level pension fund (DE0104216N). With the conclusion of the two agreements for the metalworking and chemicals industries, labour-management sponsored private pension schemes are now available for a significant portion of the German workforce.
Chemicals industry agreement
On 18 September 2001, the Mining, Chemical and Energy Union (Industriegewerkschaft Bergbau Chemie Energie, IG BCE) and the German Federation of Chemical Employers' Associations (Bundearbeitgeberverband Chemie, BAVC) concluded a collective agreement on 'lump-sum payments and old-age pensions' (Tarifvertrag über Einmalzahlungen und Altersvorsorge) and thus extended a system of company-level supplementary pension schemes which had already been in force since 1998 (DE9805265N).
In a joint statement, both social partners expressed pride at being among the first in Germany to acknowledge the problems which future demographic developments will cause, in particular the ageing of German society, and to react proactively. In 1998, in anticipation of these problems, the parties decided to provide workers with the opportunity to invest parts of their income into private company-level pension schemes. While the types of pension investment were initially limited to four different company-level schemes, the collective agreement now takes full advantage of the opportunities provided by national-level pension reform.
Based on this new law, the chemicals social partners have decided to set up a joint industry-level pension fund which is to be administered by the Bayerische Hypo- und Vereinsbank AG, a private bank based in Munich. While BAVC and IG BCE reserve the right to dominate the fund's supervisory board and to control the operations, concrete investment decisions will be taken by the bank. The new collective agreement leaves it to individual employees to choose between the new pension fund and alternative forms of private pension investment. However, because the new fund has more flexibility in taking investment decisions and also promises to minimise administrative costs, the social partners hope to sign up about 300,000 mostly younger workers from those 590,000 who are covered by the collective agreement on the new fund.
Irrespective of what kind of private pension scheme they choose, the new collective agreement entitles employees to convert part of their income directly into pension assets. This is especially appealing because. in most cases of investment into private pension funds, workers' contributions are tax-exempt and, up to the end of the year 2008, also exempt from social security contributions. The last point, however, applies only up to a cut-off point when 4% of the ceiling for income subject to social security contributions is reached. Up to this cut-off point, employees can convert income such as their annual bonus, holiday bonus and capital-forming payments.
According to the basic model defined by the collective agreements, every worker is to convert income worth EUR 478.57 per year, while the employer adds another EUR 134.98 to reach a total investment of EUR 613.55. In this basic model, employers' contributions account for 28.2% of total pension investment. For every EUR 100 an employee converts on top of that to build up a private pension, his or her employer contributes another EUR 13. While the employers' contributions to workers' private pensions are significant, it should be kept in mind that exemption from social security contributions also applies to employers. Thus, employers save close to 20% of workers' pension investment, based on this exemption provision of the German pensions law.
Metalworking industry agreement
On 4 September 2001 the IG Metall metalworkers' trade union and the Gesamtmetall employers' association agreed on a collective agreement on the conversion of income into pension assets, as well a joint declaration on initiating a pension fund for the metalworking industry. The collective agreement provides that, until the point where 4% of the ceiling for income subject to social security contributions is reached, the following income components can be freely converted into pension assets:
- the annual bonus;
- vacation pay
- capital-forming payments; and
- other income components
While the last point in particular gives employees a maximum of freedom to choose the income components to be converted into pension investment, the agreement does not require employers to provide any co-payments. Like their counterparts in the chemicals industry, however, metalworking companies also benefit from the statutory provisions which exempt them from the obligation to pay social security contributions on contributions to workers' private pensions. According to a joint declaration by the social partners, the resulting employers' savings will be used to cover administrative costs resulting from the conversion of income. According to Martin Kannegiesser, Gesamtmetall's national president, the agreement is structured around the core principle that private pensions are to be financed by employees only but administered by employers.
Like their counterparts in the chemicals industry, Gesamtmetall and IG Metall will not only provide additional investment opportunities by way of creating an industry-level pension fund, but will also directly promote and offer two other private schemes, known as the 'pension savings account' (Pensionskasse) and 'direct insurance' (Direktversicherung). All three schemes will be run by a joint union-management body, the 'Old Age Pension Metal and Electric' (Altersversorgung Metall und Elektro), which will negotiate and monitor contracts with financial services providers. These providers, in turn, are to be commissioned to run the daily business of all three schemes, which later will be offered to the 3.5 million employees in the metalworking industry.
Because, unlike the chemicals industry, there was no collective agreement on industry-level pension schemes in metalworking prior to the new accord, there are numerous small and medium-sized companies which are now for the first time required to offer some kind of private pension scheme to their employees. Thus, the IG Metall president, Klaus Zwickel, estimates that the new joint union-management body will particularly benefit employees in these small and medium-sized companies. because many of them were not covered by company-level pensions before. On these grounds, Mr Zwickel considers the agreement to be an important step in the development of collective bargaining. However, there are other notable features of this new agreement. While Gesamtmetall insisted on shielding actual investment decisions from employers' and unions' political interests, IG Metall successfully negotiated a provision in the joint declaration which requires financial service contractors to take investment decision in accordance with the principles of social responsibility and sustainable use of natural resources.
Commentary
Both agreements break new ground in terms of enabling workers to obtain a maximum return for their pension investment. While, in particular, the rules for the conversion of income into pension assets frees workers and their employers from part of their obligation to contribute to the mandatory social insurance system, it also creates severe strains on the budget of the pension, health and unemployment insurance. Every euro not to be paid into these schemes will create pressures in the direction of reducing the level of benefits or of looking for additional sources for funding. In limiting these rules for conversion of income into pension assets until 2008, the 'red-green' coalition government has already taken precautions to restrict the negative impact on the welfare state. This also means, however, that from 2009 on, union and employers have to develop new solutions for private pension investment. Thus, this major breakthrough at the bargaining table does not even apply to one whole generation of workers, and the expiry date will be approaching soon. However, while the conditions for income conversion will soon be outdated, the new jointly-run pension funds have the potential to last and to add a new dimension to the German welfare state. (Martin Behrens, Institute for Economic and Social Research, WSI)