The Wirtschaftsforum der SPD e.V, a business association backed by the German Social Democratic Party (SPD), has proposed in a surprising move an overhaul of the third-pillar Riester-Rente based on guarantees.

In a paper, the association defined the policy for a transition to “flexible guarantees” to support investments in equities and funds with stock options.

It acknowledged that equity-based retirement plans are in many cases an “attractive option” in terms of returns.

Riester-Rente is a state-subsidized pension introduced in 2002 with tax privileges. Providers of the Riester products guarantee savers at least the sum of the contributions paid and state allowances.

Wirtschaftsforum der SPD pointed out, however, that in a low interest rate environment, guarantees have a negative impact on performance and on potential returns for products to the detriment of savers.

The association sketched the characteristics of an “attractive product” for pension provision, and how government subsidies could be calibrated to fund pension products for low and mid-income savers.

It said that pension products should fit with the return expectations and risks of investors by adapting to current capital markets and providing support to pensioners/savers by continuing to use better structured subsidies and a more equity-driven approach to pension provisions.

The process to receive and manage subsidies should be simplified within the existing Riester-Rente architecture, it proposed.

State subsidies for old-age provisions should be designed to promote a broad distribution of the products to the public, it said.

The number of contracts of Riester pensions declined in Q1 2020 for all products, a result never recorded since its introduction, according to data published by the Federal Ministry of Labour and Social Affairs.

Riester products saw an overall decline from 16.530m contracts last year to 16.478m in Q1 2020. Investment funds contracts also decreased from 3.313m in 2019 to 3.307m this year, and residential Riester contracts fell to 1.811m in Q1 2020 from 1.818m last year.

For real estate Riester pension accounts, the association proposed a reduction of the interest rates below the current 2%.

It also rejected a financial transaction tax especially for small savers as “counterproductive”, because on one side pension schemes enjoy tax discounts, and on the other side capital investments are burdened with new taxes, it said.

A reform of the Riester-Rente has recently moved up on government’s agenda. To approve the basic pension law, the SPD promised the Union – the alliance between the CDU and CSU in parliament – a reform of the Riester-Rente after the summer break.

The ministry of finance, led by the SPD’s Olaf Scholz, is working with insurance companies and banks to evaluate possible changes to the Riester-Rente.

The governing parties CDU/CSU and SPD along with trade unions are fully aware that the Riester-Rente has stagnated in recent years, as stated in the final report of the Rentenkommission.

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