PROJECT M
 
Project M
Josef F. Wertschulte

The time of our lives

Josef Wertschulte tells PROJECT M about his road plan for pension and employment reforms designed to put individual employees in the driver’s seat

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The time of our lives

Josef Wertschulte tells PROJECT M about his road plan for pension and employment reforms designed to put individual employees in the driver’s seat


Project M

Mr. Wertschulte, you’re one of Germany’s experts on working time accounts [a record of working hours spent by an employee in any given accounting period showing ‘credit’ and ‘debit’ hours]. Do you also have an account like this that lets you take time off?

Josef F. Wertschulte

Of course we offer flexi accounts in our company, Anovia. Unfortunately, though, I personally cannot save into such an account because German tax authorities currently do not allow members of a company’s executive body to participate.

Project M

It seems ironic that you can’t use a scheme that you helped devise, given that you were involved in the development of the laws governing flexible working hours in Germany.

Josef F. Wertschulte

That’s true. Originally everyone could participate. Unfortunately, tax authorities used the revisions in Flexi Law II to exclude members of executive bodies. However, recent court decisions indicate that this cannot be upheld.

Project M

What was your part in the development of these laws?

Josef F. Wertschulte

In the late 1990s, as a member of the board of Bayerische Hypotheken- und Wechselbank, I began working with Volkswagen to find ways of complementing the existing short-term time accounts with long-term options. Initially, the intention was to create an instrument that would allow VW to smooth out industry cycles that fluctuated between high and low workloads.

Project M

How did the reform develop from there?

Josef F. Wertschulte

My vision was to create something bigger over time: a smarter solution for company pensions in Germany. Since I headed the working group formed by VW and our bank, I was able to drive the agenda. But without political support we would not have succeeded. In the end, Lower Saxony, as the major shareholder of VW, introduced our proposal into law.

Project M

How far did you get with that plan?

Josef F. Wertschulte

In 1998, the outgoing parliament passed the first Flexi Law, which we were able to use as a stepping stone. It represented a shift from defined pension commitments to defined contributions and deferred taxation, as well as deferred social insurance contributions. However, the law was not comprehensive enough to allow for the flexibility called for by demographic developments, and was not what I had envisioned.

Project M

Did you push for further reforms after the Kohl government was voted out of office?

Josef F. Wertschulte

Yes. I spoke with Gerhard Schröder, who had just been elected chancellor, and we agreed that Germany needed to do better. However, it was deemed wise not to change the law itself. He designated Heinrich Tiemann, assistant secretary at the Federal Chancellery, to be my liaison. His experience and input was invaluable. As a result of my earlier involvement with VW, I also worked closely with Peter Hartz and his HR department.

Project M

And did you get further with Schröder?

Josef F. Wertschulte

The whole process was complex. The key to success was to focus efforts on the implementation rules accompanying any law and some fine-tuning in the legal system. Mr. Tiemann understood the complexity of law-making and provided excellent guidance on how to proceed. Still, it took many meetings with different ministries to align interests and pull the pieces of the puzzle together.

Project M

What obstacles did you encounter?

Josef F. Wertschulte

Differing opinions and opposing interests in the bureaucracy. Power plays between ministries. Also trade unions: at the time they were still lobbying for pensions at the age of 60 and had little sympathy for our undertaking. Finally, others had their own ideas about reforms.

Project M

You mean the pension schemes designed by former German labor minister Walter Riester and German economist Bert Rürup?

Josef F. Wertschulte

Exactly. The Flexi Law and its benefits were soon overshadowed by the Riester-Rente, a grant-aided pension scheme, introduced in 2002, and the Rürup-Rente in 2005, which radically changed the framework for old-age provisions in Germany. Both these laws had a visible champion in the person after which they were named, as well as the full support of the insurance industry that benefited from them. The various laws also confused human resource departments as to what their options were and how to develop the best solutions for employees.

Project M

Has this changed since then?

Josef F. Wertschulte

Yes. Over time, it became apparent that both the Riester and Rürup schemes were too bureaucratic and didn’t address the demographic challenges that companies are facing.

Project M

When did employers start using working time accounts?

Josef F. Wertschulte

It took several years. In 2003, the first major companies implemented accounts with a monetary value only. Traditionally, such accounts had been just time based. This also had to do with the challenge of creating procedures and systems that could implement and manage ‘virtual’ accounts for individual employees.

Project M

In 2009, the second Flexi Law was passed. Was that reform helpful?

Josef F. Wertschulte

No. In fact, some early progress was lost due to that reform. It created an uncertainty that held companies back. In addition, some of its changes made it more onerous to implement workable solutions.

Project M

Which the government recognized.

Josef F. Wertschulte

Yes, but not until March 2012, when our last government’s Ministry of Labor finally published a report on the implications of the Flexi Laws and drew renewed attention to the topic. In addition, businesses have realized that demographic challenges, a call for a better work-life balance and the shift away from lifelong or long-term employment have led to the need for more flexible solutions, with individual employees in the driver’s seat.

Project M

These challenges are similar to those in other countries. Is there something that Germany could learn from its neighbors?

Josef F. Wertschulte

Most EU countries have not come very far in that respect. In Austria there is a debate whether time value accounts should become mandatory. And France is looking into models of employee ownership of companies. Although, for our increasingly mobile workforce, a system harmonized across borders would also be important. Beyond that, one has to look to the US, which has a very interesting system: the 401(k) solution.

Project M

How does that work?

Josef F. Wertschulte

It has its roots in 1970, when Penn Central – a railroad company that was at the time the sixth largest corporation in the US – collapsed. The country had never before experienced a bankruptcy of that magnitude, which prompted politicians to try and make pensions in the private sector safer.

Project M

So they passed the Erisa Act.

Josef F. Wertschulte

Yes, which made it compulsory for companies to provide ‘funded pensions,’ which are outside a company’s balance sheet.

Project M

But that system also encountered problems.

Josef F. Wertschulte

The weakness of the stock market in the 1970s put funded pension plans under severe pressure. To address this issue – at least for the future – the government passed the 401(k) act. This allowed companies to opt out of providing guaranteed pensions and instead provide monthly or yearly payments, or ‘defined contributions,’ for their employees.

Project M

Into which employees themselves invest.

Josef F. Wertschulte

Yes, employees were then able to decide how to invest these payments and look for optimal returns in the capital markets – which, of course, also meant accepting the associated risk. Employees could even make their own additional payments via their employer without having to pay taxes on these contributions. This led to a huge flow of funds into the US capital market and contributed to the bull market of the 1990s.

Project M

Is there a lesson here for Germany?

Josef F. Wertschulte

We now have the basics: deferred compensation and a defined contribution model. This provides us with a tax-advantaged method to save for retirement with the flexibility to access funds along the way if needed. However, these funds must be easy to handle and transferable with fair and equal tax treatment. We have to move away from the limiting labels ‘working time accounts’ or ‘time value accounts.’ We need broad support and awareness for a German 401(k), which companies would make accessible to everyone.

Project M

Including members of a company’s board?

Josef F. Wertschulte

Of course, and I would be one of the first to use it.

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