Germany is the undisputed political and economic leader of Europe and the euro-zone. In the early part of the last decade the country also underwent a large-scale labour market and social security restructuring, tightening its belt when it was unable to meet the Maastricht budget deficit criteria. These were the so-called Hartz reforms, named after a commission led by the former Volkswagen personnel director Peter Hartz, and this economic fitness regime underpins Germany’s economic strength today.

But Germany has been notably less proactive on pensions, with a lack of reforms to boost supplementary pensions since the Riester and Rürup reform programmes of the last decade. Instead it relies on a paternalistic and mainly PAYG regime.

Just as in other countries, the pension system is a political minefield and few politicians dare risk incurring the anger of pensioner groups. Despite a line in the 2013 coalition agreement mentioning measures to promote occupational pensions, the grand coalition last year took a retrograde step when it agreed to lower the pension age to 63 for certain people and to extend pension credits to those who had spent time outside the workforce for childcare reasons, along with other measures. And all this at the cost of €30bn in the current coalition term and €160bn by 2030, according to one estimate.

Now Germany is looking to promote supplementary pensions through sector labour agreements as has been the case for decades in the Netherlands. The figures tell the story: Germany’s funded pension assets total just 6.3% of GDP; in the Netherlands the equivalent figure it is over 150%. Germany ranks eleventh among major pension systems in the Melbourne-Mercer index. Part of the reason is that company pensions have been seen as a perk; a top-up to a paternalistic social welfare system with roots in the nineteenth century, not as a major income-replacement component.

Both trade unions and employers have rejected the government’s proposals in their current form but have left the door open to further negotiation and there is a good chance that they will succeed if the issue of employer liability for guarantees can be solved. Unions are unwilling to sever the link between the employer and the minimum return guarantee of the current system; employers would like to see sector funds open to non-associated companies.

Of course, these proposals borrow heavily from the Netherlands, where sector pension funds have been a mainstay of pensions provision for decades. In looking across the border for a social partner-orientated model for pensions, what can Germany learn from its neighbour? 

For one, it could take heed of the direction of travel, which in the Netherlands has been away from traditional defined benefit and towards what is best described as collective defined contribution, with collective risk sharing and an uncertain payout. This uncertainty, of course, goes against Germany’s strong emphasis on paternalistic guarantees. Second, and perhaps most important, is the ambitions for the system. Are supplementary pensions intended to be a top-up or to replace a greater proportion of pensions income? A larger income-replacement rate implies greater long-term investment risk if contributions are not to be unacceptably high. 

Third, social partner involvement in pensions across sectors makes pensions a much more prominent national debate, in the Netherlands in particular, because the assets are so extensive and the stakes so large. The intricacies and technicalities of the debate have led to a reform process there that has lasted years. There is no reason why a well-designed system, perhaps with an element of soft compulsion, should not help Germany to become a leader in pensions and move up the international rankings. But system design is key and the introduction of a greater degree of investment risk will be crucial.