VW introduces new pension funds

From spring 2001, Volkswagen AG in Germany plans to introduce a new occupational pension scheme which provides employees with supplementary retirement benefits. As a result of negotiations between the company's works council and management, the motor manufacturer plans to conclude a works agreement to transfer the administration of pensions to the newly founded "VW-Pension Trust eV". When this transfer takes effect, VW will be one of the first German companies to introduce a fund-based supplementary pension system. After trade unions had initially resisted plans of this type, the government announced plans to provide tax incentives for the introduction of privately-run pension funds. As part of an ongoing dispute about the future of the German statutory pension scheme, "US-style" pension funds are now adding a new dimension to the debate.

On 7 December 2000, the German car manufacturer Volkswagen AG (VW) publicly announced a plan to change completely its system of supplementary retirement benefits. Instead of spending between DEM 1.5 billion and DEM 2 billion per year on a "pay-as-you-go" basis the company will now set aside money for the "VW-Pension Trust eV". The new pension trust will invest its funds freely in the markets and thus enable the company to increase payments to its retirees. According to Volkswagen's calculations, the average market value of investments increases at an annual rate of 10%, which will enable the company to guarantee workers a 3% annual pension increase.

Pension reform still pending

While the debate on supplementary company-level pensions is gaining importance, the German parliament is still to decide on the future of the German retirement system (DE0101204F). Faced with the problem of an ageing population, the Minister of Labour, Walter Riester, has issued draft legislation to consolidate the German statutory pension scheme. According to the proposal, the German pay-as-you-go statutory pension scheme (whereby current pensions are met from the contributions of those currently in employment) will be split into two parts. The first part will be equivalent to a continuation of the existing system and thus pay retirement pensions via public administrations at the state and federal level. The entire system is essentially financed by equal contributions from employers and employees (paritätische Finanzierung). The second component will require employees to make a mandatory contribution of 4% of their gross income into company or private schemes (DE0008276F). While details of the reform are still being disputed, trade unions and employers - as well as private banks, investment firms and insurance companies - are developing models for building up a private branch of the German retirement scheme.

Existing company schemes

Trade unions and employers have already implemented a variety of models for company-level occupational pension systems. Such models differ in terms of rules for tax deduction and requirements for the payment of social security contributions. However, most schemes are based either on money put in reserve by the company or on life insurance plans. At present, 64% of all employees in manufacturing are covered by such a company-level pension scheme, while only 28% of employees in the retail sector are entitled to such additional benefits (the figures are for west Germany only).

As the table below shows, in Germany state pensions still play the dominant role and, in comparison with countries such as the USA, the Netherlands, the UK and Switzerland, company-level pensions and private pension plans are only weakly developed. While in the USA, for example, 45% of all pension income for households with two retired persons are administered by the state, the German publicly-run pension schemes account for 85% of the income of such households.

Source: Handelsblatt, 6 December 2000.

Union responses to reform proposals

It is these company-level occupational pensions in particular which have caused headaches for some unions. They feared that existing company-level schemes would be excluded from tax benefits or co-payments by the federal state under the reform proposals. In particular the Mining, Chemical and Energy Workers' Union (Industriegewerkschaft Bergbau, Chemie, Energie, IG BCE) and the Construction Workers Union (IG Bauen-Agrar-Umwelt, IG BAU), have both recently concluded collective agreements including provisions for new company-level retirement schemes and they fear that the reform will devalue these schemes. However, at a recent meeting between Chancellor Gerhard Schröder and the national presidents of several leading unions in Hanover, the government agreed to support two major types of existing company-level pension schemes, though only for a transitional period of up to eight years. Even more importantly, the Social Democrat-Green coalition government intends to introduce tax incentives and co-payments for a new type of company-level pension scheme. These new pension funds (Pensionsfonds) will provide a safe haven for existing schemes by way of converting workers' entitlements into claims against the new funds.

Because the government also agreed to provisions which protect pension assets in the event of bankruptcy, the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB) now welcomes the new funds. According to a statement by Ursula Engelen-Kefer, vice-president of DGB, the reform will strengthen the German retirement system by providing workers with tax benefits and a new opportunity for long-term investment. While the majority of German companies would still need to set up new pension funds, VW has taken the lead and prepared the ground for such funds.

The new VW-Pension Trust

The VW company works council and management intend to conclude a works agreement by spring 2001 which will provide the legal basis for the introduction of the VW-Pension Trust eV. This new company-level pension scheme will enable the company to invest pension money in stock and bond markets but will also protect employees from the risk of losing even small amounts of their assets in the event of a market downturn. VW intends to spread the risk of investment across different segments of the capital market and also guarantees employees a minimum annual revenue increase of 3%. While the company's traditional company-level pension plan was administered by management, the VW-Pension Trust eV will be jointly run by management and employee representatives. The company works council succeeded in negotiating the introduction of terms into the agreement which provide workers' representatives with a strong say in the administration of the pension funds. While representation at the level of the board of directors has not yet been determined, workers' representatives will have equal representation at the general meeting of the trust's membership (each party has 14 votes) as well as on the supervisory board (four seats each for management and workers' representatives).

In addition to these new co-determination provisions, the preliminary agreement includes the following provisions:

• workers who retired under the old rules maintain their status;
• employees aged 50 years or older can choose between the status quo and the new pension fund;
• workers are allowed to transfer their entitlements from the old system to the new fund;
• the fund will compensate employees for time out of work due to childcare and training; and
• pensioners will participate in any future increases in the value of the pension fund.

Commentary

Pension reform is probably the most complex and conflict-prone initiative on the agenda of the "red-green" coalition government. While any proposal has to be judged in terms of solidarity between different generations of workers, there are also issues involved which affect the distribution of wealth between companies and labour, between different parties involved in finance, as well as between men and women. While demographic trends and, in particular, the ageing of German society limit the financial leeway for agreements between major actors, innovative concepts at the company level such as the VW-Pension Fund Trust may indicate a promising way of solving the problem. Clearly, the VW model benefits those parents who, under the old regime, were disadvantaged because of time out of work due to childcare, and it also protects employees from the risk of stock market downturns. However, it still needs to be seen whether works councils and management are capable of leading the funds to success. While some major car makers such as BMW and Daimler-Chrysler are considering introducing similar company-level pension funds, there is still doubt as to whether the model can be extended to apply to small and medium-sized firms. As the continuing decline of company-level pension schemes indicates, they seem to find it difficult to imitate this model (Martin Behrens, Institute for Economic and Social Research, WSI).