The scientific advisory board of the German federal ministry of finance, a group of experts advising on financial policy, is in favour of a governance plan of the third pillar Riester-Rente where the state acts as an asset manager, giving however investors the option to switch to private managers (opt out), it said in a paper on the reform of the country’s first and third pillars pension systems.

The state would act to regulate private pension providers and provide information on the regulatory framework, so that the public can make informed decisions about investments, the paper said.

It would offer a broadly diversified product, with investments following the principles of modern portfolio theory, protected against political influence, the experts added in the paper.

Private pension providers could also run the asset management activities of a standardised third pillar pension product, as a second option, according to the paper. In Germany, Riester-Rente pensions can currently only be signed with private companies.

The experts at the finance ministry are looking at the Swedish model to reform the Riester-Rente in Germany. Under the Swedish premium pension model, citizens pay 2.5% of pensionable salary either to a state fund or to a private fund option on a state backed platform, and 16% to the pay-as-you-go scheme.

The coalition of political parties Social Democrats (SPD), Greens and Liberals (FDP) has agreed to reform the first pillar pension system in the direction of a pay-as-you-go and capital-funded system, so called Aktienrente, and to replace the third pillar Riester-Rente with a public fund offering a “cost-effective” product with the option to opt out.

According to the coalition agreement, the parties will also examine the legality of private investment products with higher returns than Riester-Rente.

The government is planning to start the Aktienrente this year, with €10bn financing to kickstart a public fund investing in equities globally, according to FDP member of parliament Stephan Thomae.

“In order to make pensions stable and fair in an aging society we need an expansion of funded old-age provisions. We are therefore committed to expanding the pension system to include a statutory equity pension (Aktienrente),” Thomae said in an interview with the Ausburger Allgemeine newspaper.

Building up a capital-funded pension system, the finance ministry said, does not eliminate the problems associated with a declining number of contributions and longer periods spent as retirees.

However, capital-funded systems can generate additional income for old age provisions, supplementing the pay-as-you-go pension, which will grow more slowly than the wealth of the nation in the coming decades due to demographic changes.

According to the coalition agreement, in the current legislative period the contribution rate to the statutory pension scheme should not rise above 20%, and the level of pensions would not fall below 48%.

In view of the demographic changes, in particular a further increase in life expectancy, the measures can only be financed through constantly increasing subsidies from the state, according to the experts.

Calculations have showed that in 2050 almost 60% of the federal budget has to be spent on transfers to public pension funds to finance what the experts call the “policy of the double stop line” of unchanged contribution rate and level of pensions. This policy is not sustainable in the long-term, according to the experts.

A significant increase in the contribution rate is already expected for the current legislative period, but this is likely to remain below 20%.

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