Germany: Draft Law on State Pensions

The following information was provided to us by Profion, Asinta Partner in Germany:

Germany, like many other countries, is dealing with a state pension system that continues to weaken. One solution that many countries have or are currently considering implementing is an extension to the legal retirement age. Such a solution is largely opposed by the German public, since the normal retirement age was already increased from 65 to 67 in 2012.

The coalition parties of the government have, however, reached an agreement on a draft law which would encourage employees to take part in salary sacrfice plans. The new law is geared towards small to medium companies, as well as low earners (less than 2000€ per month). Please note that employee and employer participation in these schemes is currently voluntary.

A few points worth highlighting in the draft of the new law:

• While German employees have a legal right to defer parts of their salary into a salary sacrifice plan, a small business may be reluctant to take on the additional costs associated with employees who take part in such schemes. One reason many employers are so reluctant to participate is due to the fact that the employers are liable to honor the benefit promises out of a salary sacrifice plan in case of insolvency. In order to fight against this, the government has proposed to remove the employer’s requirement to guarantee benefits out of a salary sacrifice plan. The removal of such a guarantee is only possible within the scope of a tariff agreement, which limits the situations in which this would be possible and likely negating the purpose of the reform.
• If a low earner participates in a salary sacrifice plan, the employer is obliged to transfer the tax savings resulting from the salary sacrifice to the employee’s salary sacrifice contract, upon which the government will provide a subsidy equal to 30% of the employer’s share.
• The draft of the new law includes a proposal to increase the threshold for tax, and where applicable, social security contribution free levels from the current 4% to 7% of the social security ceiling for salary sacrifice/direct insurance schemes. This would increase the amount that can be contributed to a salary sacrifice scheme without the contributions being liable to tax.

While the intention is noble, the above mentioned increase in the threshold does not mean an increase in salaries for low earners, which ultimately is the basis for their inability to make private savings for retirement.

Enactment of the law is set for the beginning of January 2018. All stakeholders and unions are reviewing the draft and will be providing comments thereto in the meantime. It remains to be seen what the feedback will be and what shape the law will take in the end – time will tell!

Thanks again to Asinta Partner in Germany, Profion, for providing us with this information.

If you have questions regarding how this new draft law might affect your business or regarding employee benefits in Germany, you can get in to contact with Profion via their contact page.