Slow to start
The pension reform passed in Germany last year was a step in the right direction for the development of private pension provision, even though the market growth expected a year ago hasn’t yet materialised.
Most blame the complicated regulatory framework as the main reason Germans have shown little interest in the new private Riester pension plans. Confusion surrounding minimum and maximum contribution rates and exit penalties helped keep Germans away from the new pension vehicles. Between October 2001 and March 2002 there was no change in the 71% of people who said they had not intention of taking out a Riester plan. The number who said they intended to do so rose only two percentage points to 23%, whilst those who had joined the system fell from 8% to 6%.
The BVI, the German asset management association, early this summer said these figures did not mean that Germans do not understand the importance of saving for their retirement, but that many workers believe the new sector-wide or company occupational schemes are a better deal. Raab Wolfgang, vice president of the BVI, says it is too early to measure the success of the reforms in the second pillars as the first occupational schemes only recently gained regulatory approval.
Among them is the chemical industry’s sector-wide supplementary pension fund, Chemie Pensionfonds, which after gaining approval in April attracted around 160 large and mid-size companies in the sector, and now represents over 100,000 workers. This, however, is only one sixth of the new fund’s overall forecast of 600,000 potential members.
Although the take-off of the industry has been slow, a recent report published by the German occupational pensions association, ABA, suggests that nine out of 10 companies in Germany are planning to established a new occupational retirement fund under the Riester pensions reform. The report also shows that most employers will offer their new retirement vehicle through sector-wide funds or collective group funds. The survey identifies Pensionskassen, direct insurance and the new Pensionfonds as the three most important types of funding retirement vehicle that are emerging at present.
Both Pensionskassen and direct insurance arrangements were the subject of another study published by Commerzbank Securities, which suggests that both structures carry literally no risk of being underfunded. The study, covering companies in the DAX30, shows that companies’ directly assigned fund assets, as a percentage of total liabilities, are an average of 39%. The same companies have, on a five-year average, a return on capital employed of 10.3%, sufficient to cover the technical interest rate of 6% at which unfunded pension liabilities are valued.
German companies using Pensionskassen or direct insurance are obliged by law to keep less than 45% of the fund in equities and liabilities must be 80% matched by Euro-denominated assets. Commerzbank research shows that very few are taking advantage of the equity limits and asset allocation remains conservative, with only 20% invested in stocks.
Good news also came from a study by Morgan Stanley that suggests that recent reports that the private sector in Germany faces a pensions time-bomb because of demographics and economic declines have been blown up out of proportion. The company said that most companies in Germany are already prepared to inject capital into their book reserves to meet pensions obligations. A spokeswoman at Morgan Stanley said that it is the state system and Pensionskassen that are likely to be badly affected. “The time-bomb that everyone talks about really refers to the state pay-as-you-go system, which hasn’t been adequately modified. And the traditional Pensionskassen, because of their funded elements, are suffering as a result of the declines in the equity markets.”
So it seems that the general situation is a bit more positive for the private sector than some expected, although it remains necessary to increase awareness among potential members and get them to sign up. A study published by Deutsche Bank Research (DB) warns that people may find themselves obliged to take out personal pension cover if the take-up of private Riester plans doesn’t improve soon. DB says that unless urgent reforms are introduced soon, the private Riester pensions are likely to remain a “flop”. The possibility of mandatory personal cover being introduced is particularly likely if the SPD, the German socialist party, forms part of the new government after the general elections that took place just after this supplement went to press.
On the occupational arena, the new government will have to clarify some confusing topics. “The second-pillar reforms are a little stringent,” says BVI’s Raab. “There needs to be greater freedom of choice between collective and individual pension fund systems and between guaranteed products with lower investment returns and those without guarantee but with higher returns.” He also criticises the way the reforms are creating hybrid DC/DB schemes. “We need pure DC schemes whose performance isn’t adversely affected by guarantees.”
So far the major achievement of the pensions reforms has been to be able to change the general attitude towards pensions. The issue of pensions was so intensely discussed in Germany last year that everyone is aware of the need for supplementary cover on retirement. Whether the chosen vehicles are right or not is a different question and only time will give us the answer.