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Nudging its way to reform

Nearly two years after the German pension association aba threw its weight behind the introduction of auto-enrolment, little has happened to increase the coverage of the second pillar.

This could soon change, at least if comments by new federal labour and social affairs minister Andrea Nahles are taken at face value. Nahles, one of six Social Democratic ministers in Germany’s new government, told Aba’s annual conference in May that although occupational pensions did not feature heavily in the coalition agreement, it did not mean there was no opportunity for change. 

Nahles indicated that, rather than opting for government intervention on par with the UK’s soft compulsion or the Australian mandatory Super system, she would favour a more continental European approach – one with a proven success rate in both the Netherlands and Belgium, where Rhineland capitalism and collective labour agreements are still commonplace.

The minister said she would be open to legislating for change to the four-decade-old German occupational pension law, but not radical change. “For me, the legal framework is, at the end of the day, only an addition to what is already being negotiated within the collective labour agreements.”

Fellow conference speakers took Nahles’s words to mean labour agreements could be used as a way to increase second-pillar coverage without the government directly intervening, although it was noted that – taken in combination with other remarks on Germany’s small and medium-sized enterprises – she probably only wished to see changes to coverage, not increases in contribution rates. 

Nevertheless, Germany’s collective labour agreements, or Tarifverträge, cover more than half the population, meaning a clause within such a contract might materially impact coverage. 

Bert Rürup, an economist and former chair of Germany’s Council of Economic Experts – the body advising the government, informally referred to as the Wise Men – believed Nahles had made her view known. “The political sphere will not be completely reliant on a voluntary system, at least if it wishes to increase coverage.

“I do not believe there will be an element of government compulsion – but there is a nice term: nudging,” he said, referring to the ‘nudge theory’ developed by an American behavioural scientist and a psychologist, itself the basis for a number of government policies across the world that rely on the electorate’s inertia.

A government-backed obligation to save, or compulsion, is unlikely in his view, as this could violate Germany’s constitution. He said the experience with opting-out models in other nations was “very good”, and highlighted that it offered the opportunity for those who viewed third pillar private saving as preferable to an occupational system – regardless of the cost benefits of the latter – the opportunity to pursue their preferred path.

Rürup added that opting out appeared to be the best approach, but warned that any such system would increase employment costs. 

To those who view the capital markets as a risk to securing better pensions through an occupational system, he simply pointed out that there was no such thing as a safe pension – first or second pillar.

Nahles’s comments will be welcomed by Germany’s industry, which has lagged behind other European nations both in coverage and on an asset-to-GDP ratio. 

While hardly an indication that the Bundestag will take radical action to boost occupational pensions, it is an acknowledgement that a capital-market-funded solution has a part to play in ensuring wealth. 

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