German pensions face a radical shake up following wide backing for Chancellor Gerhard Schroder’s plan to introduce second pillar pensions to supplement the struggling state system. Despite previous talk of supplementary schemes, it is the first time there is broad, cross-party support for reform to the occupational sector.
Schroder met last month with labour union bosses, who had criticised the government for focusing on private, or third pillar provision, saying the burden would fall on employees rather than employers. During the meeting both parties agreed to include second pillar pensions in the reform. “It’s a change in paradigms because they have not acknowledged second pillar up until now,” says Peter Koenig, executive director at Morgan Stanley Dean Witter. Until recently German social democrats viewed capital market investment with great suspicion.
A government white paper on pensions reform should have been published on 20 September but was postponed and should be published in October. This isn’t due to disagreement, rather to the complexity of the additional changes.
Second and third pillar pensions face different tax laws and investment restrictions still apply. Germany’s Pensionskassen are legally bound to a maximum 30% equity investment and they want this lifted as high as 70%. According to Koenig, the government would be wise to implement wholesale reform including the introduction of one tax system for all occupational vehicles.
One solution would be to treat all capital funded vehicles in second and third pillars the same and to raise a tax exemption of up to DM10,000 per employee per year to bring it in line with international levels.
Some remain sceptical about the announcement, claiming there are often such statements but with little or no accompanying substance but labour minister Walter Riester has recommended that next year employees pay 0.5% of their wages into private or occupational schemes, rising to 4% by 2008. Riester and Schroder have made concessions to bring about the compromise. State pensions will remain above 64% of average wages until 2030 and the link between pensions and wages which was dismantled earlier this year will be restored next year.
Private provision will not be compulsory but finance minister Hans Eichel has sugared the pill with tax breaks and subsidies that will total DM19.5bn (E9.8bn) a year by 2008.

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