GERMANY – Bavaria has become the latest German state to announce the creation of a pension fund for its civil servants in order to limit its pension costs.

According to the Bavarian government, the fund will be set up by 2009 at the latest and cover all newly-hired civil servants from that date.

Under the defined contribution arrangement, Bavaria’s government will, on a monthly basis, contribute €500 per civil servant to the fund. By 2025, the fund should have €5.7bn in assets.

Once established, the fund, instead of the government, will also pay out pensions to civil servants who retire.

Bavarian finance minister Kurt Faltlhauser said the fund was necessary amid projections that Bavaria’s spending on pensions for civil servants would rise 70% over the next 20 years.

“We need the pension fund to avoid overburdening future generations with our pension costs,” Faltlhauser said in Munich.

Currently, the Bavarian government spends around €3bn on pensions for its civil servants, and the money comes from taxpayers and other revenue.

The Bavarian government also said the Bundesbank, Germany’s central bank, would manage the fund’s assets “in a way that is secure and profitable”. As a result, the Bundesbank may invest up to 10% of the assets in equities, it said without revealing further detail.

Bavaria is the seventh of Germany’s 16 states to create a pension fund for its civil servants. The others are Rhineland-Palatinate – which was the first in 1996 – Saxony, Saxony-Anhalt, Northrhine-Westphalia, Hesse, Hamburg and Bremen.

Last week, the government in Berlin approved a draft law paving the way for the creation of a pension fund for federal civil servants hired after January 1, 2007. The assets from that scheme will also be managed by the Bundesbank.