Company pension plan

kender6

Hello,

I work in Germany and my company offers me a pension plan. I have several options of contribution and I would like to know which is the most interesting.
My company contributes with 1% of my salary to the pension regardless of what I contribute. From my side, I can chose to contribute 0% of my salary, 1% or 2%; and my company will match my contribution:

• A: Me: 0% -> My company 1%: total 1%
• B: Me: 1% -> company 1 + 1%: total 3%
• C: Me 2% -> company 1 + 2%: total 5%

Others:

• Minimum guaranteed interest of 1.25%.
• Average interest of the last 10 years: 2.75%
• 1% commission of the money invested.
• The company that offers the plan is Generally Insurance.
• Estimated retirement age: 67 years

They provide a table of benefits at retirement for a total contribution of € 100 per month. The results for any other contribution will be proportional, and therefore they can be calculated from the table. The results of contributing 100 € per month (the contribution of the company plus mine, if any) from an age of 30 years until retirement are:

• One-time payment: € 53,183
• Guaranteed minimum pension: € 142.71

I think the plan looks interesting at least when I do not need to pay for myself. But apart from that, should I additionally contribute with 0%, 1% or 2% of my salary?

Thank you in advance

Linton

Only contributing a total of 5% in salary into a pension wont give you a very comfortable retirement. At first sight the returns look appalling. Let's get a bit of clarification before commenting too much:

Is the commission 1% of the total pot or 1% of the new money? If the former is the "interest" before or after the 1% commission - does 2.75% interest mean only 1.75% net return?
Is the guaranteed pension a one-off payment and or or a pension?
Is the £142.71 per year, per month or per week?
Any protection against inflation? The stated % returns may not even match inflation.

kender6

Hi Linton. Thanks for replying. This company pension would be just an extra, on top of the German mandatory pension (9.35% from my salary + 9.35% paid by the employer).

Regarding your questions:

- The commission is 1% of the new money.
- At retirement, you can choose between a one-time payment (lump sum) or the standard pension (perhaps you can also choose a mix of them, I do not know). The number I wrote before are € 142.71 / moth, sorry I didn't specify it. These 2 numbers are considering the guaranteed interest of 1.25%.

Although I didn't ask about protection against inflation, I didn't see it anywhere so I would assume there isn't any.

ThinkingOutLoud_2

So I think there are three inner questions here as Linton identified.

Is this pension competitive?
The returns seem lower than you might hope for. I suspect your colleagues will have a view? But see below...

If an employer matches your contribution - should you take advantage?
Taken on its own, anytime someone says you save a euro and I will add one seems pretty compelling. In effect this doubles the return on your own contribution. (2.75% X 2 sounds better already).

Are you saving enough?
And if you are already seeing seeing 18.75% going in on the base - adding 5% is putting you well up the typical contribution rates people make.

On balance, it sounds worth considering hard to me unless you can find something to beat it ...

Triumph13

This is quite an interesting one as the value for money varies hugely depending on how many years you have until retirement.


If you were only a year or two from retirement age it would be a complete no-brainer as the 100% uplift you get from the employer contribution outweighs all other considerations. When you are still a long way from retirement though it becomes much worse value as that uplift gets eaten away by decades of returns that are much lower than you would expect if you were in an equity fund.


With 30 years to go you are in the region where it all comes down to what assumptions you use. If you were to assume an average real return (ie after inflation) of 1% from your scheme vs 4.5% from an equity fund then after 30 years you'd expect to be 39% better off by turning down the company contribution and investing inglobal equities instead.

ThinkingOutLoud_2

Can I just check your assumptions!

And mine.

So I am assuming costs are pretty similar.

So he puts in 2% and they add 2% - that is a 100% lift.

Simple maths says it is like getting double the interest. So he gets on average 2.75% on money he put in and 2.75% on the match. So that is 5.5% vs your 4.5%

Also he has a minimum guarantee of 1.25%. But I am not clear if that is every year or in total which affects its " value".

Either way surely 5.5% beats 4.5% ether one year or fifty?

Or am I doing something wrong?

Triumph13

ThinkingOutLoud wrote: »

Can I just check your assumptions!

And mine.

So I am assuming costs are pretty similar.

So he puts in 2% and they add 2% - that is a 100% lift.

Simple maths says it is like getting double the interest. So he gets on average 2.75% on money he put in and 2.75% on the match. So that is 5.5% vs your 4.5%

Also he has a minimum guarantee of 1.25%. But I am not clear if that is every year or in total which affects its " value".

Either way surely 5.5% beats 4.5% ether one year or fifty?

Or am I doing something wrong?

You are doing something wrong and so was I. My mistake was to miss that he gets the 1% whatever happens and so only a 100% uplift. That makes the deal MUCH worse value to the extent that he'd be 39% worse off on my assumptions if he took the deal.


The two things you are doing wrong are (1) just doubling the quoted average return and (2) not accounting for inflation.


On the first point he isn't getting 30 years of 5.5% returns. He's getting a 100% return up front followed by 30 years of 2.75%. But if you add in the impact of inflation that's more like 100% followed by 30 years of 1% which makes about 170%.


The 4.5% I quoted was a reasonable assumption of equity returns AFTER inflation so he'd get no uplift at the start but then 30 years of 4.5% which comes to 275%


As Einstein said, the most powerful force in the universe is compound interest.

ThinkingOutLoud_2

Compound interest = agree totally.

You are right - my simple calc is not mathematically correct €100 at 2.75% for 30 years is circa €225 return VS. circa €250 return for €50 at 5%. So better but not by as much as I thought it might be - APOLOGIES all!

BUT I am not sure if the average returns he mentions are down to last 10 years being poor for German pension funds or that it very conservatively invested. I guess that is key / unknown - why only 2.75%? I think maybe there are some local regulatory requirement around investment portfolio mix.

I guess the question is whether the OP's appetite to risk too. But is is certainly worth comparing vs an alternative investment.

Linton

The past 10 years have been excellent for diversified equity investing across the world. 100% overall would be typical. Compare this with the Generali pension 10 year at 2.75% return totals about 30%. Even a 50% bond fund would have risen perhaps by 50%. So the problem then is simply the annual return is very poor either because it is extremely conservatively invested or because Generali are taking a large cut. On the other hand the employer contribution is very useful.

So it depends on your years to retirement and whether you can transfer the money elsewhere to get a better return before retirement. From a quick off the cuff assessment if you have say 10-15 years or less to go or you can access the money in the timeframe then taking the maximum employers pension could be worthwhile, otherwise perhaps not. You may alternatively regard the German pension as a very safe part of your investment portfolio enabling you to take more risk elsewhere.

Either way 5% is probably not sufficient so it may be very worthwhile for you to make your own additional contributions to a personal pension.

ThinkingOutLoud_2

Linton is right per prior post > there are rules around how risky (or not) German Pension funds investments may be. No getting round that in Germany I assume...unless he goes outside this pension unless anyone knows different?

So Global returns maybe better in the future, but I don't think they are on the Generali pension menu for the same reason.

Good news though Linton, per OPs second post (you may have missed) - he actually contributes 9.35% which is matched by his employer to his first Generali pension (they have quite some differences vs the UK with second and third schemes) - so 9.35% x 2 + 5% = 23.65% is I reckon pretty healthy level of contribution.

kender6

Many thanks to all for all the answers. This is a very interesting discussion. I think I'm starting to realize the power of compound interest

Basically, the more far away I'm from retirement, the more weight the interest has compared to the matching contribution from my company. Fun fact: my company is only offering this plan to new young hires like me , I guess I now know why.

One question from your posts before:

Triumph13 wrote: »

On the first point he isn't getting 30 years of 5.5% returns. He's getting a 100% return up front followed by 30 years of 2.75%. But if you add in the impact of inflation that's more like 100% followed by 30 years of 1% which makes about 170%.

The 4.5% I quoted was a reasonable assumption of equity returns AFTER inflation so he'd get no uplift at the start but then 30 years of 4.5% which comes to 275%

As Einstein said, the most powerful force in the universe is compound interest.

How do you calculate the "equivalent" interest rate? (e.g. in the quote above, 170% and 275%) I've been looking around but I didn't find anything. It would be useful to compare different scenarios.

Regarding the German laws, the pension is guaranteed by the German government - I do not know if that means that they have to be conservative or if Generali is making a lot of profit. And yes, all German employees contribute with 18.7% of their salary. paid half by the employee and half by the employer. (Another fun fact, in total I pay over 41% in taxes) This company pension would be just an extra
Nevertheless, I need to start looking where to get these 4-5% interest rates, since right now my bank account is giving me 0%