The topics covered in our current newsletter are: “20 years of Riester pension”, “Pension insurance report 2021”, “Pension obligations of Dax 40 companies” and “Case law: pension commitment as hidden profit distribution”.
Table of Contents
- 20 years of Riester pension
- Pension insurance report 2021
- Pension obligations of Dax 40 companies
- Case law: pension commitment as hidden profit distribution
20 years of Riester pension
The Riester pension will celebrate its 20th anniversary in 2022. Introduced by the 2001 pension reform, it has been available on the market since 2002. Developed under the then Federal Minister of Labor and Social Affairs Walter Riester, it was intended to compensate for the reduction in pension levels associated with the reform at the time. To this end, it was created as a privately financed pension subsidized by state allowances and a special expense deduction.
While the number of Riester contracts rose continuously in the first 10 years, this number has stagnated at around 16 million contracts since 2011. Moreover, many of these contracts are no longer being used for savings (the Federal Ministry of Labor and Social Affairs assumes one fifth, but there is no precise overview). And there is now also a general consensus that the Riester pension is in urgent need of reform. This is because, due to legal and regulatory requirements, it is not only the return on investment that leaves much to be desired – and this despite state allowances and tax advantages. In addition, there is little flexibility and a high level of bureaucracy.
It remains to be seen whether the new federal government will be able to implement its goals from the coalition paper, or whether the Riester pension should be considered a failure after 20 years. In any case, other forms of old-age provision appear to be much more efficient.
Pension Insurance Report 2021
The German government’s pension insurance report was published at the end of the year. According to this report, the statutory pension insurance has come through the pandemic well so far. The sustainability reserve – to compensate for fluctuations in income – remained stable at around 37 billion euros, and after a zero increase in 2021 there will again be a significant pension adjustment on July 1, 2022. According to the model calculations, the contribution rate to the statutory pension scheme is expected to remain constant at 18.6% in 2022 and 2023, but then rise to 19.5% in 2024 and 19.7% in 2025. In addition, although the so-called security level (in simple terms, the ratio of pension to earned income under certain statistical assumptions such as average income and 45 years of contributions) is currently 49.4% and is expected to be 49.2% in 2025 according to the forecasts, this is also due to a change in statistical recording and calculation. If this statistical effect is ignored, the pension level in 2025 is also 1% lower at 48.2%.
However, the situation then becomes problematic after 2025: According to the report, the level of protection falls to 47.6% in 2030 and further to 45.8% in 2035 – and thus considerably below the 48% declared as the lower limit. If the change in the statistical calculation is taken into account, the gap widens even further. If we then add the forecast increase in the contribution rate to 22.2% in 2035, the need for action and reform for additional old-age provision becomes clear.
The report contains a surprise regarding the employment rate. For the first time in 20 years, the employment rate for the 60-64 age group is falling, after rising steadily from 2000 to 2019 (from 11.0% in 2000 to 44.4% in 2019). A key factor in this development is likely to be the deduction-free pension from 63 for those insured for many years introduced in 2014, which has now been applied for by 1.74 million people – 340,000 thousand more than originally expected by the government at the time.
Pension obligations of the Dax 40 companies
According to a recent study by the consulting firm Mercer, the pension obligations of the Dax-40 companies have fallen by 35 billion euros from 435 billion euros. The main reason for this reduction was the increase in the discount rate, which rose significantly at the end of 2021 compared with the end of 2020. Due to accounting requirements, the amount of pension obligations is always subject to strong fluctuations as soon as there is a change in the interest rates on which the calculation is based, without there being any change in the pension commitments themselves. Fortunately, this unpleasant accounting effect does not exist in the case of a pension commitment made by means of a congruently reinsured provident fund.
Case law: pension commitment as hidden profit distribution
In a ruling published at the beginning of the year, the Düsseldorf Fiscal Court ruled that the vesting criterion does not apply to a pension commitment financed by deferred compensation (FG Düsseldorf, ruling dated November 16, 2021, 6 K 2196/17). The ruling was based on the common practice of the tax authorities to consider pension commitments to managing directors who are also shareholders as hidden profit distributions if the managing director has already reached or exceeded the age of 60 when the commitment is made.
This was also the case in the ruling, where the commitment was made after the age of 60 and provided for retirement benefits from the age of 71. The tax authorities argued that the promised benefit could no longer be earned until the managing director leaves the company – after all, this is only after 10 years. However, this objection was not upheld by the court. Instead, in the opinion of the court, the contributions are to be classified as a pension provision – and not as a hidden profit distribution – since they were financed in this case by the managing director’s deferred compensation. This means that the employer does not have to bear the financial consequences of the commitment and is not economically burdened. The court referred to the relevant case law of the German Federal Fiscal Court.
However, the ruling is not yet legally binding. Although the court did not allow an appeal, the tax office has filed a non-admission appeal with the Federal Fiscal Court. It would, however, be welcome if the tax authorities were to reconsider their fundamental view on this issue. For while, on the one hand, politicians are making considerable reform efforts to introduce adequate pension provision for persons not covered by statutory insurance (see, not least, the extensive plans in the coalition agreement on this), the tax authorities sometimes seem a little too committed to classifying such provision as targeted tax avoidance and refuse to recognize even established forms of pension provision as soon as they involve the self-employed. The goal of the legislature, which introduced a legal right to deferred compensation, for example, not without reason (namely to strengthen self-financed pension provision), is thus thwarted in any case. It is to be hoped that legislation and financial administration will become more consistent in the future.