Heribert Karch, chief executive at MetallRente, the German pension scheme for metal workers, has dismissed a proposal from three federal state ministers for the creation of a state-backed supplementary pension, saying they drew the wrong conclusions despite having offered a “brave and accurate diagnosis”.
Karch is also chair at the aba, the German occupational pensions association.
He directed his comments at a proposal from three ministers in the federal state of Hessen – economy minister Tarek Al-Wazir, a member of the Green party; social affairs minister Stefan Grüttner, a member of the Christian Democrats (CDU); and finance minister Thomas Schäfer, also a member of the CDU.
The CDU and the Greens form Hessen’s current government.
In December, the trio maded a proposal known as “Deutschland-Rente” – a standardised supplementary pension that would be backed by the state (hence the name), to be run by an independent sovereign fund with employees automatically enrolled under an opt-out system.
MetallRente’s Karch welcomed the ministers’ intervention for offering a clear diagnosis of the problems facing pension adequacy in Germany – “I have yet to read such a brave diagnosis from politicians” – but he otherwise dismissed the proposal.
“The proposal would be the most complicated by far for lawmakers and no help either for employers or employees,” he said.
“The risks are a technical and political mix.”
He questioned the envisaged fund’s ability to generate sufficient returns, saying it would face the worst possible starting conditions given the prevailing low-interest-rate environment and that it also could not be launched with a 100% allocation to equities.
The latter is a reference to the ministers’ suggestion the sovereign fund could have a higher allocation to equities than many current occupational retirement products.
Karch also expressed doubts that the state vehicle would be able to achieve a meaningful size and dismissed the feasibility and desirability of emulating comparable arrangements in other European countries, such as the Norwegian oil fund, Sweden’s AP7 and NEST in the UK.
The state ministers’ idea is for the new state-backed pension to be based on defined contributions only, and this, too, was criticised by Karch.
While attractive to employers, the “pay and forget” principle runs counter to employees’ “set up and forget” preference, he said – i.e. the desire for an arrangement that, once established, they can put to the back of their minds and not have to “monitor for the rest of the life for fear of poverty in old age”.
He also questioned how a state-backed DC option would be able to compete with other providers offering a guaranteed minimum pension.
“The state hasn’t had that level of risk appetite for a long time,” he said.
The envisaged auto-enrolment approach with an opt-out option, meanwhile, is “designed to flop”, in Karch’s view.
He pleaded for the governing coalition to be allowed to focus on the solutions already under discussion to address the pension deficit, instead of being distracted by the Deutschland-Rente proposal.
The latter, no matter how constructively intended it may be, will namely be just that – a disruption – said Karch, if not a “betrayal of all those who on all levels and in all the implicated ministries are currently feverishly agonising over a solution that can still be implemented during this legislative period”.
There is not much time left before pension debates are coloured by campaigning for elections, he added.
“Let’s let the current government do their homework before we write out a cheque for the next one,” he said.
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