German pensions: A new not-quite revolution
Germany’s current pension reform law is set to allow auto-enrolment and pure defined contribution pensions – if anyone wants them. The federal government will be able to say it has done its bit to promote workplace pensions, but the success or failure of the reform in increasing workplace pension coverage above the current 60% level will lie with the social partners.
The previous major reform of German occupational pensions in 2002 was ushered in by the then labour minister Walter Riester. It recognised the importance of mobilising pension capital to help reduce the burden of the pension system on younger generations and to maintain German labour market competitiveness.
The reform was also intended to boost occupational pensions, although citizens have mostly made use of the tax and top-up incentives through individual insurance contracts. One or two large-scale sector pension funds were created with the reforms and workplace pension coverage steadily crept up. But Reister did not lead to the renaissance in pensions some hoped for.
Indeed, Bavaria’s premier, Horst Seehofer, said last year that the Riester reforms had failed. Despite 16.5m Riester contracts and a reduction in the number of households without supplementary pension coverage from 73% to 39% in 15 years, critics point to product proliferation, patchy coverage, low coverage among low earners, complex rules, high distribution and administration costs and low annuity payouts.
The reforms were hampered by over-caution: enrolment was voluntary because Riester himself was unwilling to back compulsion in case it backfired. The basis of the concept was also awkward in that contributions were explicitly intended to plug a gap arising (the so-called Rentenlücke) from a policy to cap state pension contributions.
The Pensionsfonds occupational vehicle created by the Riester reforms was an untidy compromise; its guarantee of paid contributions is neither terribly enticing for employees used to fixed interest returns nor sufficiently free of a guarantee to appeal to risk-averse employers. It highlights the urgent need to simplify Germany’s complex web of retirement vehicles.
In a 2016 paper published by the Max-Planck-Institut, Axel Börsch-Supan and co-authors draw a balance: the reforms were neither a success nor an outright failure. Options to improve the system range from product simplification to auto-enrolment, and a national fund has been mooted.
The current reforms risk repeating some of the mistakes of the Riester plan. Devolving responsibility to social partners for creating new sector schemes risks passing the buck. A better approach would be to back auto-enrolment and introduce an across-the-board simplification combined with tax incentives that would make workplace pensions more attractive.