Opinions on company pension plan

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Contribution to the pension plan

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kender6
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Opinions on company pension plan

Post by 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 montly 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
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ghariton
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Re: Opinions on company pension plan

Post by ghariton »

I note that you are based in Germany and that this is a Canadian forum. Certainly, I don't know anything about how pensions work in Germany and how they are regulated.

However, based on the limited information you have provided, it seems to me to be a good idea to have your employer contribute as much as possible. This is "free" money for you. So I would seriously look at contributing 2%.

But there are many caveats.

(1) How secure is the pension plan? Can it default if the employer falls upon hard times? If so, what are your legal rights?

(2) If you were to invest your part of the contribution on your own, what kind of return would you expect? Would you be capable of investing on your own? If not, what would be the cost of an adviser?

(3) I believe you are describing a Defined Contribution plan, rather than a Defined Benefit plan. If so, the risk of poor investment returns rests with you (apart from the minimum guarantee of 1.25%). Is the minimum adjusted for inflation, if inflation becomes significant? On the other hand, if this is really a Defined Benefit plan, what is the value to you of shifting risk from yourself to the employer or his trustee?

(4) What other needs do you have for your portion of the contribution? Do you have loans to pay off? A house to buy or a mortgage to pay off? More generally, what is your financial situation and how does this pension plan fit in with your other financial considerations?

I'm sure I have overlooked a few points. But I hope that gives you a start.

Best of luck

George
The juice is worth the squeeze
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adrian2
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Re: Opinions on company pension plan

Post by adrian2 »

5) How much time does it take for the company's contribution to become vested? That is, it remains yours even if you leave the company.

6) Can you later switch to a different investment vehicle, e.g., index / tracker funds?

7) Can you cash out the investments, should you wish to do so? What are the conditions attached?
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kender6
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Re: Opinions on company pension plan

Post by kender6 »

Hi ghariton, adrian2,

To your questions:

1) Pension plan is garanteed. If Generali were to disapear, the German Goverment would take over.

2) I do not know. How much could I expect? 4-5% perhaps?

3) Plan is not adjusted for inflation. Sorry but I do not know the difference between the defined Contribution plan and a defined Benefit plan.

4) No other needs, mortages or loans. Right now, I earn more money that what I spend. I'm just starting working and I will be looking on where to invest my money.

5) My contribution is always mine, whatever happens. If I leave the company, I cannot invest anymore but the money keeps there unitl I retire and I get it.

6) Not possible to switch to something else.

7) I cannot cash out the investments, or I can cash them out at retirement (earliest age by the contract is 63, e.g. arund 35 years from now)

I've been investigating and the main "issue" in this plan is that the interest is low (from what I am being told, comapred to other investment options). For long term, e.g. 35 years, considering a compund interst, that is a problem. For short term, however, the matching contribution from the company cleary compensates the low interest.
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adrian2
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Re: Opinions on company pension plan

Post by adrian2 »

Let's start with the assumption of 35 years @ minimum guaranteed interest of 1.25% (I would not count on the average as it's been a huge bull market in fixed income).

A 30 year Germany Bund yields 1.09% (wow).

Contributing the max, you get a total 2.5 times on each euro.
2.5 1/35 = 1.0265, so that's an additional 2.65%

A total of 3.9% annual interest guaranteed for three decades or longer starts to sound interesting, compared to the long bund above, and to a 5 year bund rate of -0.48%.
Of course many things can change in 35 years.
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“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
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