Occupational pension schemes in Germany

MA-Thesis / Master von Peter Schulz

Abstract:

Based on national legislation and past business practices in Germany, this master thesis / management report illustrates a specific German issue of occupational pension schemes by comparing the example of the Cologne-based German subsidiary of INFICON, the company with which I am employed, against INFICON’s other subsidiaries in Liechtenstein and in the US.

In the past, it was customary for both national and international companies to provide different kinds of occupational pension schemes for employees as an additional incentive. Unlike US and Swiss companies, German corporations retained the money collected from occupational pension schemes in their companies in order to benefit from these low-cost internal funds instead of investing them in external funds.

Rating aspects, the increasing internationalisation of the capital markets and Basel II are forcing INFICON GmbH to reduce its balance sheet by outsourcing pension reserves. Anglo-Saxon dominated rating agencies, in particular, are still extremely critical about pension reserves and treat them as "real" debt capital. In addition, the EU Regulation 1606/2002 stipulates that as of 2005 all capital market-orientated corporations with registered offices in EU Member States will have to draw up their group statements in accordance with International Accounting Standards.

Furthermore, these long-term contracts (occupational pension schemes based on book reserves, Direktzusage) are increasingly imposing a burden on German companies as human life expectancy has constantly been rising, and business growth rates have been decreasing. Moreover, companies were forced to change their policy because of the pressure resulting from the globalisation of fiscal laws for multinational corporations.

Approach: It is the objective of this master thesis / management report to identify INFICON’s business issues with regard to its pension book reserves in view of the common German business practices of the past and their changes in light of the internationalisation of the capital markets and of current legal requirements in Germany and the EU and to draw up appropriate recommendations.

By explaining INFICON’s diverse approaches in its subsidiaries in the USA, Liechtenstein and Germany, the unequal treatment of national occupational pension schemes in Germany and in other countries will be demonstrated. For that reason the national retirement systems in Switzerland (which is very similar to Liechtenstein’s system), the US and Germany will be outlined in chapter 3. Moreover, the five most common German occupational pension scheme vehicles (Direktzusage, Unterstützungskasse, Direktversicherung, Pensionskasse, Pensionsfond) with regard to the new German Income Tax Act (EStG; Einkommenssteuergesetz) in force since January 1, 2005 as well as the financial impact of the pension liabilities concerning international accounting standards (e.g. US-GAAP and IAS) in comparison to the German Commercial Law HGB (Handelsgesetzbuch) will also be presented. Further effects on financial borrowings (Basel II) will be discussed. The idea is to point out prevalent national approaches and concepts regarding retirement systems in Germany, Liechtenstein and the USA and to show how these relate to the issue of occupational pension schemes of INFICON GmbH in order to reveal the differences and to endorse suitable recommendations that can be applied internationally.

In chapter 3 the main factors of the bibliography research presented in chapter 2 will briefly be summarized.

The problematic business issues (occupational pension schemes based on book reserves) of INFICON GmbH will be evaluated and its impact on the financial performance will be demonstrated in chapter 4. Moreover, alternative vehicles for occupational pension schemes for German companies will be analysed in more detail by highlighting the benefits and downsides and comparing them in a matrix.

A management recommendation will be given in chapter 5, which will be based on different means of outsourcing pension liabilities. Furthermore, the possibilities of concluding a contractual trust arrangement (CTA) will be discussed in depth. The realisation process of outsourcing pension liabilities under German legislation e.g. the German Income Tax Act (EStG), the Commercial Law (HGB) or the Works Council Constitution Act (BetrVG; Betriebsverfassungsgesetz) will not be subject of this management report.

Chapter 6 introduces a survey conducted with several well-known and influential German companies (183 enquiries, 38 completed questionnaires) in order to detect the best practice already established in German economy. It is aimed at finding out about the experiences already gained by German companies regarded as opinion leaders. Or more precisely, the intention was to find out how many German companies that provide occupational pension schemes had dealt with the issue of outsourcing pension liabilities and to ascertain whether they had decided for outsourcing or rather for sustaining the status quo of internally funding occupational pension schemes. By focusing on the example of companies that had already dealt with this issue or even settled for their own individual approach, it was aimed to find out about the anticipated advantages and the reasons that led to the outsourcing of pension liabilities. In addition to that, the survey was centred on the question what were the advantages of the outsourcing, or in other words what was the outcome of outsourcing pension liabilities to an external legal entity.

Table of Contents:

	TABLE OF CONTENTS	II
	LIST OF FIGURES	IV
	ACKNOWLEDGEMENTS	V
1.	INTRODUCTION	1
1.1	Rationale	1
1.2	Approach	2
2.	NATIONAL AND OCCUPATIONAL RETIREMENT SYSTEMS	4
2.1	National Retirement Systems based on the Example of Switzerland, USA and Germany	4
2.1.1	Switzerland	6
2.1.2	USA	8
2.1.3	Germany	11
2.2	The Treatment of Occupational Pension Schemes in Germany: Five Investment Vehicles	13
2.2.1	Direct Pension Promise/Book Reserve (Direktzusage)	15
2.2.2	Benefit/Support Fund (Unterstützungskasse)	17
2.2.3	Direct Insurance (Direktversicherung)	18
2.2.4	Staff Pension Insurance (Pensionskasse)	19
2.2.5	Pension Fund (Pensionsfond)	20
2.3	The Impact of Pension Liabilities on the Financial Statement of a Company	21
2.3.1	FAS 87 vs. IAS 19 vs. HGB	22
2.3.2	Basel II	27
3.	SUMMARY: NATIONAL/OCCUPATIONAL RETIREMENT SYSTEMS	29
4.	INFICON AND ITS PENSION SYSTEMS	34
4.1	Introducing INFICON	34
4.2	INFICON GmbH's Business Issues	36
4.3	Impact On Financial Performance/Balance Sheet	37
4.4	Occupational Pension Schemes for INFICON's German Subsidary: Overview of the Advantages and Disadvantages	43
4.4.1	Direct Pension Promise / Book Reserve (Direktzusage)	44
4.4.2	Benefit/Support Fund (Unterstützungskasse)	45
4.4.3	Direct Insurance (Direktversicherung)	46
4.4.4	Staff Pension Insurance (Pensionskasse)	47
4.4.5	Pension Fund (Pensionsfond)	48
4.5	Occupational Pension Schemes and the Impact on INFICON/Matrix	49
5.	ASSUMPTION/MANAGEMENT RECOMMENDATION	50
5.1	Outsourcing of Pension Liabilities	52
5.1.1	Compensation of Pension Obligations	52
5.1.2	Transfer to a Staff Pension Insurance or to a Direct Insurance	53
5.1.3	Transfer to a Pension Fund	53
5.1.4	Transfer to a Contractual Trust Arrangement (CTA)	54
5.2	Assumption	56
6.	ANNEX	58
6.1	Introduction - Survey: best practice in German companies	58
6.2	Realisation - Survey: best practice in German companies	59
6.3	Outcome - Survey: best practice in German companies	64
6.4	Summary - Survey: best practice in German companies	72
	BIBLIOGRAPHY	73
	LIST OF ABBREVIATIONS	77

Table of Contents:

	TABLE OF CONTENTS	II
	LIST OF FIGURES	IV
	ACKNOWLEDGEMENTS	V
1.	INTRODUCTION	1
1.1	Rationale	1
1.2	Approach	2
2.	NATIONAL AND OCCUPATIONAL RETIREMENT SYSTEMS	4
2.1	National Retirement Systems based on the Example of Switzerland, USA and Germany	4
2.1.1	Switzerland	6
2.1.2	USA	8
2.1.3	Germany	11
2.2	The Treatment of Occupational Pension Schemes in Germany: Five Investment Vehicles	13
2.2.1	Direct Pension Promise/Book Reserve (Direktzusage)	15
2.2.2	Benefit/Support Fund (Unterstützungskasse)	17
2.2.3	Direct Insurance (Direktversicherung)	18
2.2.4	Staff Pension Insurance (Pensionskasse)	19
2.2.5	Pension Fund (Pensionsfond)	20
2.3	The Impact of Pension Liabilities on the Financial Statement of a Company	21
2.3.1	FAS 87 vs. IAS 19 vs. HGB	22
2.3.2	Basel II	27
3.	SUMMARY: NATIONAL/OCCUPATIONAL RETIREMENT SYSTEMS	29
4.	INFICON AND ITS PENSION SYSTEMS	34
4.1	Introducing INFICON	34
4.2	INFICON GmbH's Business Issues	36
4.3	Impact On Financial Performance/Balance Sheet	37
4.4	Occupational Pension Schemes for INFICON's German Subsidary: Overview of the Advantages and Disadvantages	43
4.4.1	Direct Pension Promise / Book Reserve (Direktzusage)	44
4.4.2	Benefit/Support Fund (Unterstützungskasse)	45
4.4.3	Direct Insurance (Direktversicherung)	46
4.4.4	Staff Pension Insurance (Pensionskasse)	47
4.4.5	Pension Fund (Pensionsfond)	48
4.5	Occupational Pension Schemes and the Impact on INFICON/Matrix	49
5.	ASSUMPTION/MANAGEMENT RECOMMENDATION	50
5.1	Outsourcing of Pension Liabilities	52
5.1.1	Compensation of Pension Obligations	52
5.1.2	Transfer to a Staff Pension Insurance or to a Direct Insurance	53
5.1.3	Transfer to a Pension Fund	53
5.1.4	Transfer to a Contractual Trust Arrangement (CTA)	54
5.2	Assumption	56
6.	ANNEX	58
6.1	Introduction - Survey: best practice in German companies	58
6.2	Realisation - Survey: best practice in German companies	59
6.3	Outcome - Survey: best practice in German companies	64
6.4	Summary - Survey: best practice in German companies	72
	BIBLIOGRAPHY	73
	LIST OF ABBREVIATIONS	77