The German government could be forced to backtrack on its plan to establish a state-run pension fund within the third pillar pension system, one the most contentious points of discussion within the stakeholders group proposing to reform a stagnant Riester-Rente.
The government coalition of the Greens, Social Democrats (SPD) and the liberal party FDD had promised in their electoral programmes to “fundamentally reform” the system of private pensions, examining the possibility of setting up a public fund with a cost-effective offer with the option to opt out.
The Greens in particular wanted to replace the Riester-Rente and Rürup pensions with a publicly-run fund, so-called Bürgerfonds für die Rente, as it was called in the party’s electoral programme.
It is no surprise that the Ministry for Economic Affairs and Climate Protection (BMWK), run by one of the leaders of the Green party, Robert Habeck, described the choice made by the majority of the group, rejecting the idea of the public fund, as regrettable.
A public pension fund with an opt-out option would contribute to the efficiency of the third pillar pension system, drastically reducing the costs for marketing investment products and asset management, and further spreading high-quality old-age provision, the BMWK said in a statement.
According to the fund industry association BVI, which is also a member of the focus group (Fokusgruppe Altersvorsorge) proposing reforms, it is not clear why a public product should incur lower administrative and capital investment costs than a private sector product.
“Moreover, sales and consulting costs, as well as costs for digital services and inventory maintenance, do not simply disappear,” it said in a statement explaining its position on the third pillar reform.
BVI has categorically refused to accept the idea of establishing a public fund for the third pillar, noting that it would lead to “massive market distortions”, it said.
Discussions about the introduction of a public fund with automatic enrollment leaves open the essential question of the implementation of such a plan, it added.
Employers would bear the burden if they were responsible to put in place the idea, BVI said, adding that a large number of employers already offer company pension schemes, including the first social partner models, helping to finance them.
“It would be difficult to understand why employers should also be responsible for the administration of a private pension scheme. Especially for small businesses, new administrative tasks often represent a major burden,” it continued.
Moreover, according to BVI, a state-organised solution would be at the mercy of governments changing over time, increasing the risk on returns, lack of diversification, unnecessary restriction of the investment universe, misappropriation of funds, with impact on governance and, above all, leading to a lack of competition and innovation.
The Confederation of German Employers’ Associations (BDA) believes that a state-run fund with an opt-out option does not offer the advantages that private pension products and company pension schemes already offer.
A state-run fund would also burden companies, causing additional costs, it would distort competition at the expense of other providers of private provision, it said in a statement.
According to BDA, tax authorities should be responsible for overseeing auto-enrollment into a third pillar scheme, assuming that who is able to pay taxes can provide for old age provisions. This system would also reach those who are not employed.
Aba, the occupational pensions association, has in principle also rejected the idea of a public pension fund for the third pillar pension system, which would further increase the complexity of funded old-age provisions, it said, adding that company pension plans that already exist would have to be spread more broadly among employees.
However, Aba is in favour of a possible replacement of the opt-out model with a company pension.
The Trade Union Confederation (DGB) is instead against the idea of enrolling only employees – with or without the right to opt out – to pay their own contributions to a publicly managed pension fund.
A public fund would not be the answer to pressing socio-political questions relating to the level of income, especially since it is unclear whether the fund would provide for an annuity or a payment plan and possibly pay-outs decreasing over time, it said.
The German insurance association GDV believes the opt-out option would increase pension plan participation rates, but even opt-out models cannot ensure that sufficient provisions for old-age are made in the long term, and savings rates may be low, it explained.
Overall, the public fund’s contribution to the spread of private pension plans will remain very limited, GDV added.
Less guarantees and a radical change for allowances
BDA has proposed that guarantees are granted not on the contributions paid, and no longer at the age of retirement, but calculated on the expected benefit period “lifelong gross contribution guarantee”.
Retirees could then choose the form of guarantee that suits them according to their risk appetite, BDA said, underlying the positive aspects of diversifying investment opportunities, and equity investments over the long term.
The employers association is also pushing to reform and simplify the allowances system, increasing the basic payment to €200, bringing tax deduction options to 4% of the maximum contribution amount, and expanding the group of people eligible for subsidies to include all employed persons and self-employed.
Aba said that a reform of the Riester-Rente directly affects company pension schemes, as many pension plans include contributions by employees that are eligible for Riester-Rente subsidies.
Therefore, the reform of private old-age provision must take the link between second and third pillar systems into account to avoid a negative impact on companies’ pension schemes in the long term.
A consultation process on how to strengthen occupational pensions has ended on 11 May, involving the Ministry of Finance (BMF) and various industry associations and experts, with the government likely to prepare a law to reform the second pillar pension system.