Two of Germany’s largest finance associations have teamed up with a consortium of German banks to produce a 10-point proposal for pension reform which they have submitted to the government. Germany’s banking lobby is notoriously fragmented and the 10-point plan is the first time banking associations and financial institutions have reached a consensus.
Germany’s BVI, the mutual funds association, and BDB, the association for private banks, drew up the proposal with Deutsche Bank, Dresdner, Commerzbank, Morgan Stanley Dean Witter, Metzler and DEVIF, the KAG for the German co-op system. Germany’s association for industry, the BDI, and the joint council for the chamber of commerce have also backed the proposal and signatories are lobbying other associations to sign up.
In May Walter Riester, the labour minister, admitted the inadequacy of Germany’s PAYG system and the government has drafted a funded pension scheme. Although the 10 proposals back the government’s plan to introduce funded pensions, they urge the government to go further. “Only a reform of all three pillars- state, corporate and private pensions will provide adequate benefit levels in the future,” says the paper. Riester’s labour department is expected to publish its draft bill in mid-September.
The proposals suggest the government treat second and third pillar contributions equally. It also calls for new investment instruments in both pillars, allowing individuals a wider range of products and freedom of choice. Required guarantees come in for criticism in the report. In Germany, insurance companies by law have to offer minimum guarantees of 3.25%. Asset managers cannot and this has long been a source of dispute, asset managers claiming they are disadvantaged. To guarantee pensions contributions, the pension product should have an explicit guarantee from a bank of an insurance company.
Alternatively the fund should offer an implicit guarantee and agree to supervision by a new government regulator. “Private pensions could be invested in insurance products, diversified pension investment funds or bank savings plans with guarantees… the advantage of such a programme lies in the combination of a high level of safety with a broad range of products,” says the report. It also encourages competition.
Reform of the second pillar, or corporate pensions, is vital to make them more attractive to both employer and employee. The report recommends the government introduce Pensionfonds, regulated by German investment law, and able to run defined contribution and defined benefit schemes.
Matties Klein, managing director of Metzler Asset Management, one of the signatories, says the consensus would have been inconceivable a year ago but tax reforms earlier this year have helped the process. Klein says the feedback has been encouraging and more importantly, there appears to be cross-party agreement.