Current developments in German pension schemes: What are the benefits of the new target pension?
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Current developments in German pension schemes: What are the benefits of the new target pension? An Chen1 · Manuel Rach1 Received: 3 April 2020 / Revised: 6 July 2020 / Accepted: 21 August 2020 © EAJ Association 2020
Abstract We analyze the newly introduced German occupational pension scheme called target pension (“Zielrente”), which links the beneficiaries’ benefits during the retirement phase to the mortality experienced among the pension beneficiaries and the perfor‑ mance of the financial market, from a pension beneficiary’s perspective. We model the contract payoffs related to the target pension according to the new enhancement law on German occupational law. Specifically, we include two parameters in the plan design, one to control the surplus participation and one to control the loss par‑ ticipation. These parameters are chosen in such a way that the initial wealth of the retiree equals the initial value of the target pension. With the help of expected life‑ time utility and wealth equivalent, we find that the target pension provides a mean‑ ingful supplement to the first and third pillar. Further, we find some comparative advantages of the target pension over the traditional pure defined benefit and some defined contribution plans from a policyholder’s point of view. Our analysis with reasonable parameter choices shows that target pension plans can be outperformed by defined contribution plans with variable annuities, while the latter are accompa‑ nied by a considerably higher ruin probability. Keywords Target pension · Occupational pension schemes · Collective risk sharing
* An Chen an.chen@uni‑ulm.de Manuel Rach manuel.rach@uni‑ulm.de 1
Institute of Insurance Science, Ulm University, Helmholtzstr. 20, 89069 Ulm, Germany
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A. Chen, M. Rach
1 Introduction One of the major societal challenges is the changing demographics due to our aging society. While birth rates remain low, life expectancy has been increasing continu‑ ously for several decades, leading to high costs for social security systems. A shrink‑ ing working population has to support pensions of an increasing retiring popula‑ tion, which destroys an effective functioning of the statutory pay-as-you-go system. At the same time due to current low interest and highly volatile stock markets, it becomes more difficult to build up capital reliably over long time horizons. How to provide pension security and how to deal with an aging society is a very challenging task in contemporary social security, both in developed industrial and developing countries. Diverse measures have been taken to provide better pension security. In Germany, the role of occupational and private pension plans, the second and third pillar of the pension system, has been substantially enhanced. According to the new law of occupational pension plans (Betriebsrentenstärkungsgesetz), a new occupa‑ tional pension plan, so called target pension (“Zielrente”, TP), was introduced and implemented in 2018. Due to the complexity of the pension system, it is
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