The German parties in talks to form a ’traffic-light’ coalition – the Social Democrats (SPD), the Free Democrats (FDP) and the Greens – have agreed to add a capital funded component to the pay-as-you go system.

According to the document sealing a coalition agreement after the first round of talks, the next government will deploy in a first step in 2022 €10bn to the Deutsche Rentenversicherung, which manages the state pension scheme.

The Deutsche Rentenversicherung will be allowed to invest reserves in capital markets. The parties will look to stabilise in the long term the level of pensions and the rate of pension contributions by reorganising the system combining a capital-funded part with the classic pay-as-you-go, it said.

Moreover, according to the final document, the three coalition parties plan to reinforce and expand the first pillar statutory pension to include women, older employees and skilled migrants.

A future traffic-light coalition will maintain a minimum level of pensions of 48% of average wages, avoid pension cuts, and it won’t increase the retirement age.

Companies and private pension schemes remain important parts of the three-pillar pension system to secure benefits during retirement.

Therefore the next government will “fundamentally reform” the system of private pensions by assessing the possibility of setting up a public fund to offer an inexpensive product with an opting-out clause.

The coalition parties also plan to examine the possibility of introducing an investment product for private pensions with higher returns than those achieved by the Riester-Rente, according to the final document.

Commenting at the end of the exploratory talks, the secretary general of the FDP, Volker Wissig, said that a path had been drawn “to modernise society, the economy and the state”, also by adding a capital funded coverage to statutory pensions.

The FDP had proposed the idea of the statutory equity pension, Gesetzliche Aktienrente, with a state fund based on the Swedish AP7.

The three parties are now ready to start negotiations to form a coalition to support the new government. The result of the exploratory talks represent a compromise to bridge the divide on pension policies which can lay the basis for a future, more solid agreement.

The result of the talks between the three political parties represent a compromise on their pension policies. The SPD and the Greens, in fact, support maintaining a level of pensions at 48% of the average wage and expand the statutory pension system potentially for all.

The Greens and the FDP share the idea of a state fund investing long term in line with ESG principles, in the case of the Bürgerfonds of the Green party, and in equities in the case of the FDP.

The SPD had proposed a standard product for private pensions based on the Swedish model and organised by the state.

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