Pure DC in Germany – How does it work?

Pure DC in Germany – How does it work?


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Speaker(s): Thomas Hagemann (Mercer Deutschland GmbH), Georg Thurnes (Aon Hewitt)

This presentation (45 minutes) is intended to provide an overview about how the German DC works in practice.

To understand why pure DC is such a revolution in Germany we first have to deal with the current framework, which still exists. Currently, occupational pensions always comprise explicit or implicit guarantees: The plan itself or the company has to assure a specified level of benefits (e.g. based on a defined interest rate). These guarantees lead to limitations on asset allocation currently resulting into low investment returns and lower benefits and require higher solvency margins for the financing entity.

Under the new framework guarantees are not even allowed. Here, the plan members participate in lower cost (e.g. because of lower solvency margins) and higher returns (because of less conservative investments).
Though the new framework does not ban individual saving models, it prefers collective saving models. This is an important difference to DC plans in other countries: The market volatility can be buffered collectively.
Annuities are mandatory and an integral part of the system. This constitutes a second important difference to DC plans in other countries. The funding ratio during decumulation has to be between 100 % and 125 %. To support this buffer, the discount rate for calculating annuities for new retirees may be chosen more prudently than the discount rate used for calculation the present value of the annuities.

Beside the buffers already mentioned there is a third one which is intended to work for both entitled and retired plan members. It can be built up by an additional "safety contribution". Union agreements shall include such a safety contribution but it is not mandatory.

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