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The German model of risk distribution in
supplementary occupational pensions
Csaba Burger,
Gordon L Clark
Exeter, 7th January 2010
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Research background
• The German pension reform of 2001 was a milestone on the road towards pension individualisation; it
• decreased the level of the public pensions;• enhanced the voluntary, funded, occupational (and private) pension system
(Riester-pensions); • and therefore shifted investment risks to employers and individuals.
• The aim of this research is to
• Understand the nature of risk involved in the new occupational pensions;• Discuss the importance of the employee’s risk-related decisions;• Investigate the employee-level determinants of risk-related decisions.
• Our paper• Gives an overview of German occupational pensions from the nineteenth
century onwards;• Explains the unique, low-risk environment of the German pension system;• Reinforces existing research on risk-aversion and behavioural finance.
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Occupational Pensions in Germany – the legal environment
Right to occupational
pensions
Immediate risk sharing
Institutional risk sharing
At the employer
All risk at the employee
No strong legal requirements
Some employee rights
Employee has the right for an
occupational pension
Employers bear the risk of pension provision
Minor institutional protection (with some external
providers)
Complex institutional protection
Before 1974
1974 – 20011974:
Occupational Pensions Act
After 20012001: „Riester”
Pension Reform
Sources: BetrAVG, VAG, Wiedemann (1991)
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Two choices define the risk situation: scope and sharing
Choice I:Risk Scope
• Direct insurance• Life insurance: taken by the
employer, beneficiary is the employee
• Provided by life insurers• Low administrative burden
• Pensionskasse• Traditional institutions with the
exclusive mission of pension provision
• Similar rules to direct insurance
• Pension funds• New institutions in 2001• Aim: to imitate the returns of the
Anglo-Saxon pension funds• Liberal investment policies
Choice II:Risk Sharing (from the Employee’s View)
• Defined benefit• Guaranteed positive rate of return• Permitted defined rate of return is
maximised for new contracts: decreased from 3.25% in 2002 to 2.25% in 2008
• (German) Defined contribution• Guaranteed non-negative rate of
return• Nominal value of contributions
plus subsidies (less the cost of insurance) must be guaranteed
Low risk in these occupational pensions
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Investment and institutional regulations limit occupational products’ risk exposure
Regulation of investment risks Institutional regulation
• Regulated by the Insurance Act(s) and Solvency II (EU-directive)
• Quantitative (asset allocation) requirements
• Rules on permitted asset types, asset mixing, geographical regions, etc.
• More liberal rules for pension funds
• Reporting and controlling processes• Regular ALM reports• Mandatory stress-tests with 4
scenarios• Transparency requirements
• Tight supervision, intervention rights (BAFin)
• Liability order for pension provision:
1. External provider, if fails, then
2. Re-insurer: Protektor AG (for pension funds: PSVaG), if fails, then
3. Employer
• Not all Pensionskassen are re-insured – in exchange for even tighter supervision
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Offer determined by the Employer
Offer may be limited by the employer
The research question
Pensionskasse
Direct insurance
Pension fund
Defined benefit(German) defined
contribution
Research question:
What are the determinants of the actual risk distribution between the
employer and the employee?
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Decisions are modelled by binary-logistic and multinomial regressions on a unique, proprietary database
Data
• Database of a German occupational pension provider
• 270 000 employees, linked to • 12 000 employers
• Details of the pension contracts• Enrolment dates from the start of
2002 till the end of 2008
1. Product choice
2. Defined benefit or defined contribution
Dependent variables
Explanatory variables
• Gender• Age in the year of enrolment• Yearly contribution amount• Source of financing (if there is
employee contribution)• Enrolment year (2002, 2003, …, 2008)
Employer offer
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The analysis follows the two-steps of the sales process: employer choice limits the employee’s options
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Findings reinforce existing theories and show the specialities of the German situation
Results
• Similar results both for product choice and for DB-DC variables
• Usual risk-related variables• Gender, age are have explanatory power: male and the young are more
risk-tolerant• The higher the savings amount, the more risk the employee is willing to
take• No employee financing implies the most risk-averse product
• Specific environmental characteristics• The later the enrolment happened (2002-2008), the less risk the individual
was willing to take• The financial crisis of 2008 hardly had any effect – results are a part of a
greater trend• Employer: the larger the company, the more options are available; the
more likely employees choose risky products
• Germany is distinctive for the low risk environment rather than the low risk-tolerance
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• Beckstette A. und Zwiesler H.J. (2004): ‘Die Abgrenzung beitragsbezogener Pensionspläne aus Sicht des Asset-Liability-Managements’. Preprint Series. Fakultät für Mathematik und Wirtschaftswissenschaften Universität Ulm
• Börsch-Supan, A., Reil-Held, A. and Schunk, D. (2008) ‘Savings incentives, old-age provision and displacement effects: evidence from the recent German pension reform’. Journal of Pension Economics & Finance, 7 (3): 295-319
• Burger, Cs (forthcoming) ‘The role of social partners in transforming the German welfare state’. Draft version of the paper is available from the author at request.
• Clark G L, Knox-Hayes J, Strauss K (2009) ‘Financial sophistication, salience, and the scale of deliberation in UK retirement planning’. Environment and Planning A 41(10) 2496 – 2515
• Strauss, K (2009) ‘Cognition, context, and multimethod approaches to economic decision making’. Environment and Planning A 2009, volume 41, pages 302-317
• Wiedemann, G (1991) Die arbeitsrechtliche Entwicklung der betrieblichen Altersversorgung in Deutschland 1920-1974. Archiv für Sozialgeschichte 1991/31, pp 157-178.
Selected references