German Government Introduces Pension Reform Legislation

Washington, DC, April 6, 2001 - The German government has introduced pension legislation that would create a new type of occupational pension scheme in the nation. The pension legislation also would amend the current occupational pension schemes. This part of the legislation was passed by the lower house but was rejected by the upper house of Parliament and is now in the conciliatory committee.

The pension legislation is currently being debated in the lower house of the German Parliament (Bundestag). The proposed pension legislation would create a new type of occupational pension scheme-"pensionsfonds" in which employees may contribute up to four percent of their salary (in 2008) exempt from tax. Apparently, three products would be eligible for the system: mutual funds, bank products, and insurance products. Retail mutual funds could not be used for the pension scheme, and special funds must be created. The funds also must be managed by a German management company.

The proposed legislation apparently imposes more flexible investment rules on pensionsfonds by moving away from restrictive quantitative investment rules to qualitative investment rules. The proposed legislation does not currently provide details of the investment rules. As a result, the specific investment requirements and restrictions remain to be seen.

The proposed legislation would require pensionsfonds to guarantee capital upon retirement and to insure against longevity risk. To provide for longevity, pensionsfonds would have to pay either an annuity upon retirement or a lump sum that must be used to purchase an annuity. There also may be discussion of coverage of other biometric risks (disability and premature death), and coverage of these biometric risks may be incorporated into the legislation.