In Parallel to the State Pension Reform Act which will reduce the state pension entitlement of private sector employees over the next thirty years to 67.8% (instead of the current 70%) of an average income over a working life time as a result of demographic developments in Germany, Parliament has enacted a Personal Pension Plan Act (Altersvermögensgesetz - AVmG) which will allow all those employed in the private sector who are consequently entitled to compulsory social retirement benefits (state pension), to build up individual asset-backed pension plans. As a rule, contributions to a personal pension plan within the limits specified under the AVmG will be tax exempt and the state will grant incentive payments which will grow over the next few years through to 2008, rewarding, in particular, those educating children. The Act will come into force on January 1, 2002. The first step becomes effective at that point and will provide a market volume of approximately €uro 7 billion and when the last step becomes effective as of the beginning of 2008 this will have a market volume of approximately €uro 30 billion, taking into account inflation and income increases. The insurance industry expects to be able to achieve approximately 60% of this market against competitors such as banks and investment funds. The personal pension plans to be provided under the new Act must comply with certain criteria, the most important of which are described below:
1. The new personal pension plans under the AVmG are available to those who are required to make compulsory contributions to the state pension plans and, essentially, comprise all those who are employed in the private sector and also some other groups such as recipients of unemployment benefit, or parents having taken educational leave. Consequently, all state employees, including civil servants, and all self employed persons do not qualify for benefits under the AvmG. As an exception to this rule, married individuals whose spouse qualifies may be entitled to the privileges under the new Act, if they decide to contribute to a personal pension plan.
2. The state encourages contributions to personal pension plans by granting specified benefits which will be increased in four biannual steps through to the year 2008. The basic benefit will amount to € 38 in the years 2002/2003 and will be increased by the same amount biannually to reach € 154 in the year 2008. The additional child benefit is more important as it will start at € 46 for 2002/2003 and will then be doubled for the next two year period and trebled for the years 2006/2007 and will finally reach the amount of € 185 in 2008. The additional child benefit will be paid to the mother, unless both parents apply for the payment to be made to the father.
The full amount of the benefit will only be paid in the event that the beneficiary contributes an amount equal to 1% of that part of an individual’s income which is subject to compulsory contribution to the state pension agency in the first biannual period and this percentage increases by three equal parts to 4% from 2008. If the beneficiary fails to pay these minimum contributions to his, or her, personal pension plan, the benefit attributable to him/her will be decreased apportioned proportionally. The law provides for a certain minimum contribution and also for rules determining the contribution those not having a working income but who still qualify. The benefits will be paid upon application only and such application has to be directed by the beneficiary to the entity controlling and administering the personal pension plan, for instance, the insurer. The insurer then has the duty to gather all individual and policy data, the contributions paid in and transmits all data of the all applications received in a calendar quarter up to the end of the month following the end of the calendar quarter to the competent authority which is the state pension administration agency, the Bundesversicherungsanstalt für Angestellte, which will pay out the benefits. Those offering privileged personal pension plans will have to take into account the additional administrative duties and related costs in the process of calculating their products.
The German legislature decided to apply the principle of deferred taxation and, therefore, has as a rule allowed the contributions to the personal pension plan up to aforementioned ceiling including the benefits to be deducted from the taxable income. This rule, however, has been modified under the somewhat questionable concept of social justice in the event that the result of the tax exemption provides the individual contributor with an advantage exceeding the aforementioned benefits. In such case the benefit will be added to the income tax payable.
3. Unless beneficiaries have the opportunity to opt to pay their contributions and to channel the available benefits to a pension fund or other pension institution organised by or through their employer, they will be entitled to privileges and benefits only in the event that the personal pension plan is a product certified by the competent authority. Such certification is regulated by the Personal Pension Plan Certification Act (Altersvorsorgeverträge-Zertifizierungsgesetzes - AltZertG). The competent authority appointed is the Federal Insurance Supervisory Board (BAV) which now has its office in Bonn. The pre-emptive control of personal pension plan products and the appointment of the BAV as the competent certification authority are somewhat debatable. In the first place it is worth noting that not only insurance companies will be able to offer qualifying personal pension plans but also banking institutions and investment funds which are, by no means, subject to the control of the BAV. Moreover, the scope of control of the products in connection with the certification is not an insurance related control but a control for conformity with the tax requirements which determine the qualification of the respective products. In relation to qualifying personal pension plan products offered by insurers one may finally have to take into account that the pre-emptive control of insurance products is no longer permissible within the member states of the EU and, as a result thereof, also not in Germany. Despite these aspects, the legislator has decided to vest the BAV with the certification of the personal pension plan products which will incidentally produce the somewhat surprising result that applicants will have to go to the tax courts if they wish to contest the refusal of the BAV to certify a personal pension plan product.
The AltZertG makes it clear that the control of personal pension products in connection with the certification is limited to the compliance of the product with the tax and benefit requirements and does not contain any review of the quality or the price worthiness of the product. The BAV has, in the meantime, emphasised on several occasions that its certificate must not be regarded or promoted as a kind of quality control of the product beyond compliance with the tax and benefit requirements.
The certification requires an application to the BAV by the applicant which may be a foreign or German enterprise which, however, has to be subject to German supervision. This also applies to foreign insurers who are permitted to do business in Germany either through a branch or under the principle of the freedom to provide services. In addition to insurers, banking institutions, undertakings for collective investment in transferable securities, other investment companies and some security firms which, however, have to fulfil certain prerequisites may apply for the certification if they intend to offer qualifying products. The applicant has to submit the contemplated product to the BAV which means its relevant terms and conditions, including the complete policy, for example. There is no need to supply actuarial documents as verification of the product as such is neither available nor permissible. In the event that the application is not complete, the BAV may request the applicant to supply additional explanatory documents within a period of three months. As a rule, the fee payable for the certification amounts to € 5,000.
4. The certification procedure comprises the assessment of the following criteria:
- The personal pension plan must be in writing and in the German language. If addressed to a foreign resident, the provider may attach a translated version of the product;
- Qualifying products comprise annuity insurance, similar capital investment contracts in the meaning of the insurance regulations, bank deposits with accumulation of interest earned, investment funds with accumulation of the earnings and, in some cases, contracts for the acquisition of residential property. Insurance contracts if concluded prior to January 1, 2002, may qualify in the event that the terms and conditions are adjusted to the new requirements;
- The beneficiary has to make contributions over a longer period of time without the Act determining the period of time necessary. Single premium contracts, therefore, do not qualify;
- The annuities payable under the personal pension plan must not be paid prior to the beneficiary having attained sixty years of age or being entitled to receive state pension benefits. In the event that the beneficiary has taken out a disablement insurance in connection with the personal pension plan, such benefits may obviously be paid at an earlier time in the event that the beneficiary has become disabled. The provider must not pay out part of the accrued capital in a lumpsum but has to pay out monthly annuities with the right to pay three monthly annuities every three months. The beneficiary may opt to reinvest part of the accrued capital in a new personal pension plan but then such a plan has to provide for the payment of regular monthly annuities up to the age of eighty-five. It is permissible to make an arrangement with the provider foreseeing the payment of a balance of the accrued capital, if any, in the event of premature death to a third party beneficiary;
- The product must ensure that the provider guarantees that the beneficiary will at least have an accrued capital at the time the annuities become due and payable which is at least equivalent to the contribution actually paid and the benefits granted by the state. The costs connected with the contract have to be allocated to the plan over a period of ten years by equal amounts and, therewith, it is not allowed to zillmer such costs. This may cause financial problems for the providers as they will have to pay such costs up front, irrespective of whether they use their own staff, agents or brokers as the latter will certainly not be prepared to wait ten years before getting their full commission;
- -The provider has to inform the beneficiary in writing once every year on the use of the capital contributed, the amount of the accrued capital, the costs of distribution and the administration of the assets and the earnings achieved. In addition thereto, the provider has to inform the beneficiary of the extent to which it has taken into account ethical, social and ecological aspects in investing the contributions provided. The legislature has provided that the extent of the information to be provided will be specified in an additional regulation which, however, is not yet available. In particular, the last duty may raise objections. The legislature has explained that it wishes to direct the investment of the capital to be gathered under the personal pension plans into sustainable investments which provokes a number of legal concerns as the contributions should be primarily invested in secure investments generating healthy earnings. The information has to be provided in writing in the German language.
5. The legislator has introduced a further novelty in connection with the AvmG: the beneficiary has the right to change the provider, so he may terminate the contract with the first insurer and request that the accrued capital be transferred to another provider of personal pension plan products. It is foreseen, however, that the beneficiary will only be able to retain the benefits received under the pertinent tax provisions in the event that the transfer is made to another privileged personal pension plan product.
In addition to the aforementioned information during life of the contract, the Act states that the provider has to give adequate information to the beneficiary prior to the signing of the personal pension plan product agreement. This duty does not only comprise the information which has to be supplied in accordance with the insurance provisions on the basis of the EU life directives, but goes beyond such information duty, adding thereto information on the amount and allocation of the contract costs, the costs of the administration of the accrued capital and the costs for a change of provider. The provider also has to verify whether the applicant has another similar agreement with it, for instance, a life insurance policy which would qualify for a conversion into a qualifying product and to inform the applicant accordingly.
6. Qualifying insurance policies have received their nickname of "Riester-Policies", thereby bearing therewith the name of the Minister for Labour who is responsible for the new legislation. Despite being very complex products, such policies will be available on the market shortly; the BAV has announced that applications for certification may be filed as of July 1 of this year. The Riester-Policies may become the catalyst for increased investments by German citizens into life assurance products. Currently German residents invest annually in life assurance an amount equal to about 2.5 % of the GDP which is only 50% or even less of what is invested in life policies in France or in England. It is already foreseeable that the current reduction of the entitlement to state pension will not be the last and as a result thereof the importance and necessity of private pension plans will increase over the years to come. Those who want to participate in a rapidly expanding market should, therefore, be able to offer the required products without too much delay.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.