Implementation of the IORP II Directive

On 13 January 2017, the amended Directive on the activities and supervision of institutions for occupational retirement provision (IORP II) came into effect.¹ The amended version replaces the existing IORP Directive from 2003 and must be transposed into national law within two years.²

The IORP II Directive provides for material changes – as compared with the existing Directive – in the qualitative requirements and information obligations.³ These provisions in particular will be of great significance for the German institutions for occupational retirement provision, the Pensionskassen and Pensionsfonds, and will create a need to make corresponding changes.

BaFin working group

BaFin has established a working group for the transposition of the IORP II Directive. It will be concerned not just with issues relating to the pure implementation of the Directive into the Insurance Supervision Act or into legal regulations, but also with subordinate legal provisions, such as guidance notices and circulars issued by BaFin. It is already clear that there will be changes or new publications in this area as well. EIOPA also intends address the transposition of the IORP II Directive in 2018. BaFin will participate in EIOPA working groups.

Act to Strengthen Occupational Pensions

The German Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz) has created the option of providing pure defined contribution schemes in occupational retirement provision since 1 January 2018 (see info box "Pure defined contribution schemes").⁴

Previously, the German Occupational Pensions Act (Betriebsrentengesetz) only allowed for defined benefit plans. In those cases, the employer is liable to the employee for a specified amount of benefit. An advantage of defined benefit plans, which guarantee the benefits, is that they provide a certain planning dependability. A disadvantage of these guarantees is, for example, a relatively low initial pension, since the external pension provider (Pensionskasse, Pensionsfonds or life insurance undertaking) must make its calculations on a secure basis. In addition, investments are subject to significant restrictions: only limited investment in real assets is permitted.

The Act to Strengthen Occupational Pensions expands the possible types of plan to include pure defined contribution schemes, where the employer is liable only for paying the contributions to the implementing institution. In the case of defined contribution plans, the implementing institution is not allowed to grant employees guaranteed benefits. This avoids the disadvantages of guarantees. In particular, higher pension payments can be made initially than would be the case if they were subject to a guarantee. Various provisions of the Act to Strengthen Occupational Pensions ensure that, despite the absence of guarantees, pure defined contribution schemes provide employees with a minimum level of protection.

A precondition for using pure defined contribution schemes is a related collective wages agreement. If the parties to the collective wages agreement agree on an occupational pension scheme in the form of a pure defined contribution scheme, they must participate in its implementation and management and therefore accept long-term responsibility. Moreover, there are extensive special supervisory regulations for pure defined contribution schemes which the implementing institutions must comply with in addition to the other requirements of supervisory law. For example, they are required to establish separate guarantee assets (Sicherungsvermögen) or a separate investment portfolio for investments. This ensures that they are kept apart from all other investments and – including the income earned – are used only for the benefit of those employees to whom the pure defined contribution scheme was provided. There is a standard catalogue of permitted types of investment and rules governing investment diversification for institutions implementing pure defined contribution schemes.

For pure defined contribution pension schemes, the implementing institutions must grant a pension for the lifetime of the beneficiary, but the amount is not guaranteed. There are specific provisions governing how the amount of that pension must be determined and adjusted subsequently. The effect of this is to prevent arbitrary determinations to the disadvantage of the employees. The implementing institutions are required to take particular account of the pure defined contribution schemes as part of their risk management procedures. This applies especially to the processes for measuring, monitoring and managing the pensions, as well as for limiting their volatility. In addition, there are specific obligations to provide information to BaFin and to the beneficiaries.

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