State employer subsidies in company pension schemes for low-income earners

A company pension scheme allows the employee to agree on deferred compensation with their employer. The employee waives a portion of their gross salary – every month, for instance – and the employer pays this as a contribution into an insurance policy. This procedure basically saves employees from having to pay social security contributions and taxes on this portion. But it also saves the employer from having to pay social security contributions on this portion.

The German Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz, BRSG) coming into force in 2018 meant that employers were obliged to support their employees in building up a pension by making a contribution to their deferred compensation. Previously, this contribution was only obligatory for new policies dated 1 January 2019 or later. As of 1 January 2022, employers will be obliged to pay this contribution for all existing deferred compensation policies.

Conditions for the contribution obligation

The legislator has laid down the following rules for the contribution obligation:

• The employer’s contribution is compulsory for a maximum monthly amount of EUR 284.00 (corresponds to four per cent of the contribution assessment ceiling set out in the German Statutory Pension Insurance West 2021 (Gesetzliche Rentenversicherung West 2021)).
• The deferred compensation is paid into direct insurance policies or pension funds – provided that there are no deviating regulations in the collective bargaining agreements.
• The employer’s contribution is compulsory for new commitments from 1 January 2019.
• The employer contribution amounts to a flat rate of 15 per cent of the deferred compensation amount – provided that the employer actually saves the social security contributions.
• The employer may voluntarily improve their employees’ situation.
• The employer’s contribution is obligatory from 1 January 2022 at the latest for commitments already made before 1 January 2019.

Opportunities for insurance companies and pension providers

In addition to the benefits for employers and employees, the mandatory employer contribution also offers a number of opportunities for insurance companies and pension providers. Example of these include:

• Exploiting additional sales potential
• Increasing the level of awareness
• Increasing premium income
• Strengthening customer loyalty
• Strengthening customer acquisition

Challenges for insurance companies and pension providers

Administering policies is a major challenge for insurance companies and pension providers. This is especially true in the case of existing policies for which a high actuarial interest rate has been agreed and calculated. The actuarial interest rate is usually significantly lower for new policies. Is it economically possible and reasonable for the insurance company or the pension provider to add the employer’s contribution to the total contribution? Absolutely not.

The employer’s contribution is also obligatory for direct insurance policies from deferred compensation for self-employed occupational disability insurance. In this case, the policyholder usually undergoes a health assessment when the policy is concluded. If the total contribution is increased by the employer’s contribution, the policyholder may be overprovided. Furthermore, the policy application, for example, was accepted without restrictions. It would not be possible to have the policyholder undergo another health assessment during the policy period due to the pre-existing conditions.

The employer can voluntarily increase the contribution, for example to 25 or 50 per cent. This is a good HR management instrument for retaining or attracting employees to the company, especially given the shortage of skilled workers. The voluntary increase in the employer’s contribution makes the requirements for insurance companies and pension providers even more complex in terms of implementation.

Insufficient or a total lack of technical support is often a major challenge. The existing administration system is often unsuitable to reconcile the administration of the original policy and the employer’s contribution. Those involved are unaware of or do not use the technical options available to them. In black-box processing, the process surrounding the employer’s contribution could be fully automated and processed, that is, not require manual intervention by an employee.

Solution

Creating a concept is a good way to tackle the challenges. One challenge in concept development and implementation is the structured approach and procedure that is needed. The framework conditions must be verified and taken into account, in addition to defining the required goals – regardless of whether, for example, it is a matter of statutory and legal requirements, or organisational or technical circumstances. Otherwise, there is a risk that the task will take up too much unnecessary time, leading to the framework conditions and important aspects being disregarded.

The insurance company or the pension provider should ask itself the following questions, among others, when drawing up the concept:

• What goals should be achieved with regard to the employer contribution?
• What are the general framework conditions?
• What impacts must be avoided?
• How will the goals be achieved?
• What measures can be derived?
• Which departments are affected by the implementation?
• Which measures have to be implemented – after they have been evaluated on an economic level?
• Which technical options are available (and in the future)?
• Who will take care of the implementation?
• By when should the individual measures be implemented?

It is important that trained employees with practical experience develop and implement the concept. The employees must not only be familiar with the topic of company pension schemes including the German Act for Strengthening Occupational Pensions, but must also possess methodical-didactic knowledge. In addition, they must also possess technological expertise, including distinctive business knowledge, to be able to achieve the defined goals as well as to back them up them with customised IT strategies where necessary.

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