Occupational pension provision is on the brink of taking off amongst small German companies, if a recent report in the influential business daily newspaper Handelsblatt is to be believed.

The report has pointed to a number of indicators that suggest that pension schemes are set for a boom period in the Eurozone's economic powerhouse.

Generous state pension provision has traditionally meant few of Germany's 1.7 million small and medium enterprises bother providing pensions and a study from providers ERGO indicates that only 37 per cent of companies with fewer than 500 employees currently offer a scheme.

A shortage of talented employees in Germany as it undergoes a strong economic recovery is now making good pension provision a greater asset for employers, however. Handelsblatt for instance mentions Seuffer, a family electronics company whose head of personnel Sabine Rentschler said: "We can't offer a big fitness studio or any other luxury perks, so we are taking care of our employees with a pension scheme instead."

Encouragingly for the investment industry, whilst more smaller companies now want to offer staff a pension scheme, they are less willing to do this in the traditional German way of direct pension promises which supports retired ex-employees straight from book reserves. Recent changes to accounting standards make this direct provision appear 25% more expensive on company balance sheets, and rising life expectancy is making it increasingly risky, especially for small companies with narrow operating margins.

Small companies who want to offer pension provision with minimal risk are therefore increasingly turning to pension funds, with industry-wide funds being a natural option for smaller firms, and insurance companies, who offer tailor-made pension funds to small employers.

Since 2002 all employees have been legally entitled to demand that employers offer them a salary sacrifice pension scheme supported by tax relief, but many workers have either been reluctant or too apathetic to demand one.

Caught unaware

Experts claim that a lack of employee awareness, as well as employer reluctance are together stopping the further take-up of pensions amongst small enterprises. The ERGO survey indicated that 85% of employees were unaware of their legal pension entitlement, and 40% of small to medium companies are said not to have offered a salary sacrifice scheme yet under the 2002 regulations.

Frank Neuroth, the ERGO board member in charge of company pension schemes, told Pension Funds Insider that "first and foremost there is a need for more information".

Referring to Germany's competitive job market, Neuroth says that companies are increasingly in a competition for the best skilled workers and managers, and so "occupational pension provision is of increasing importance in these times of high employee turnover and an ever greater shortage of young workers."

Whilst an ageing population promises to help develop the second pillar to compensate for an unbalanced first pillar, Neuroth also argues that this will make offering pension provision more important for recruitment. "Due to the unfavourable demographic changes in Germany this competition will get even hotter in the next few years", says Neuroth.

Should the battle to secure the best workers get more intense as forecast, there is every reason to expect that workplace pensions will become more typical at German small to medium companies. Neuroth adds that "the costs associated with occupational pension provision are no reason for the low take-up amongst smaller companies, as the costs in suitable methods such as contribution matching are low due to savings on social security contributions".

The road ahead

Changes to the government's tax incentivises are expected later this year to allow investment companies to compete on level footing with insurers in providing 'direct insurance' style occupational pensions. Thomas Richter, the Chief Executive of the German Federal Association for Investment and Asset Management recently told Pension Funds Insider of his hopes that these reforms would bring new occupational pension products to small companies.

Neuroth agrees that "simpler and more transparent taxation rules" would help "occupational pension provision to compensate for the decreasing level of care provided by the state pension". Neuroth also called for greater portability for salary sacrifice savers changing employers, streamlined regulation allowing earlier retirement and a greater emphasis on corporate pension provision in the collective agreements that German unions and employers negotiate across industrial sectors to set pay levels and working conditions.

Citing the example of the chemical industry, whose employer association and union set-up a massive 'official' industry-wide fund a decade ago, Neuroth said "a stronger anchoring of occupational pension provision in collective agreements is desirable."

A recent YouGov survey also indicates that awareness of pensions is poor with employees at companies with fewer than 500 workers. This is argued to be problematic once schemes have been set up, in that offering a pension scheme without fully engaging employees is alienating many potential savers.

Chistoph Müller, who headed the research, said "companies need to understand that occupational pension products don't sell themselves and should rethink their passive position on them. Proactively informing and explaining is needed to lure employees out of their reservations."

First published: 01.06.2011

dbillingham@wilmington.co.uk