Germany: Rise and fall of funded pensions
Funded schemes for German civil servants are drawing criticism - for investment policies, low contributions or because they are being discontinued in many cases. Barbara Ottawa reports
Pension expert Prof. Bernd Raffelhüschen from the University in Freiburg calls the setting up of a pension fund for civil servants in the province of Rheinland-Pfalz a "laudable effort" but not much more. In fact, he is talking about all similar schemes set up in 11 German provinces so far, plus one for civil servants on a federal level.
Raffelhüschen criticises the schemes for being only ‘funded' in the narrowest sense, investing in the relevant province's own debt. "This has nothing to do with funding liabilities," he says and adds that the provinces are merely making more debt via the back door and "tricking" themselves by postponing repayment.
He also points out that the same is true for the mandatory reserves that every province has to put aside for retirement provision. These are also solely invested in local debt and therefore fail to profit from the capital markets. "The schemes have to move to asset allocation," Raffelhüschen argues.
Freiburg University had been commissioned by the local branch of the taxpayer association in Rheinland-Pfalz to look into the so-called ‘Versorgungsfonds' which had been set up in 1996 and which was the first of its kind to be established in Germany.
In short, Raffelhüschen is criticising the funds as "inadequate", either because they were set up "too late" - for example in Rheinland-Pfalz he expects the largest retirement wave among civil servants to occur long before the first payments are made from the fund - or because too little money was put in.
But this is an argument Klaus Stürmer, managing director of the AKA, the Munich-based association of local and church pension schemes, does not accept without further explanation.
He points out that "inadequate funding" is a generalisation as not all provinces have set up the fund with the aim to achieve full funding of all pension liabilities. In fact, some even explicitly note the fund was only set up to reduce the costs of retirement provision.
Others, however, have passed legislation with the intention of eventually funding all civil servants' pensions, or at least those who joined after the fund was set up. In Thüringen, for example, the finance ministry explicitly states that the fund for civil servants is "not a funded pension scheme but a reserve pool to ease the burden of future retirement provision costs".
"Full funding is not always intended, also because of the time frame and the economic environment," Stürmer explains. He adds that the provinces in the former East Germany might have a head start when it comes to financing pensions as they did not participate in the West German government hiring spree of the 1970s.
Regarding civil servant schemes on a municipal level, Stürmer reports that they have helped to stem the increase of retirement provision costs, which was only 1% for the years 2002-07, and which is expected only to increase to 1.5% annually until 2050. Also, for more than a decade now, many schemes have offered their members voluntary funds to meet future income needs.
However, those mechanisms were created earlier than those on a provincial level.Stürmer also adds that the provincial and the municipal level are not 100% comparable.
"In addition it had been clear from the start that the money saved in the municipal funds, which the municipalities joined voluntarily, could not be used for anything else," Stürmer stresses, hinting at his major criticism regarding similar funds on a provincial level.
Last year he told IPE there had to be sustainability in the decisions made by the authorities, as well as in the investments after it was reported that Bayern and Brandenburg reduced their contributions to the schemes because the money was needed elsewhere.
In the meantime, the financial crisis has completely stalled plans for setting up a Versorgungsfonds in Niedersachsen, and Schleswig-Holstein still has not produced a legal framework which had been promised for last year.
In Nordrhein-Westfalen, the constitutional court has halted a budget amendment which would have included a top-up of the civil servants pension fund. Opposition parties had contested the budget saying amassing further debt is unconstitutional.
Further, Bayern and Thüringen have now completely halted contributions to the fund because of financial troubles. Bayern has announced that this measure will be limited to two years. In Thüringen the finance ministry noted that the scheduled contribution of €8m for 2011 will not be made because the province would have to take up a loan to do so.
"You do not start saving when you cannot pay outstanding bills, do you?" finance minister Wolfgang Voß noted in a press release.
For Stürmer these are problematic decisions as "retirement provision needs people's trust to function". The opposition parties in Thüringen are even talking about a "breach of law" and their counterparts in Bayern are also harshly criticising their provincial government's decision.
"Economically it may be the right decision to take money out of these funds in emergency situations rather than take up a probably more expensive loan but the question is whether this sends out the right signal," Stürmer explains.
As for asset allocation Stürmer notes that the criticism regarding local government debt was certainly true for the past but that funds are beginning to change their approach - or at least they are talking about it.
"Every fund is different but generally it looks like they will act a bit more freely, maybe going towards a 10% equity quota and EU sovereign debt," says Stürmer, but adds that of course only time will tell whether these ideas will be realised.
One province that already does things differently is Brandenburg, where 94% of the around €200m which had been put into the fund upon inception at the start of 2009 was invested in high-rated EU investment grade bonds.
However, this investment led to major criticism from the opposition parties, which are claiming that the Irish bonds in the fund will default. The local government argues that at the time the investments were made, Ireland was solvent and a government representative pointed out that Ireland will remain solvent as it is under the EU rescue umbrella.
Brandenburg is also one of the provinces to have included a clause in the law on the Versorgungsfonds that does not allow any withdrawals before 2020.
It can be argued that these heated debates regarding retirement provision, covered extensively in local media, show an increasing interest of Germans in pension matters and funded schemes. But the fact that six provinces will be holding elections this year is probably boosting the issue. And the coverage also reveals a lack of information on certain issues.
According to Stürmer, the legal framework regarding civil servants' pension provision is one of them. For example, there is currently a debate on the so-called ‘sustainability factor' introduced in the state first pillar pension system which does not cover civil servants as their retirement provision is separate from other types of government employee.
Critics are calling for this factor, which links contributions to demographic calculations, to be introduced to civil servants' retirement provision in addition. However, Stürmer explains that this ‘sustainability factor' would actually only replace an earlier demographic variable that had been scrapped from the state first pillar for political reasons in 1999 but which remained in place in the civil servants' schemes.
Further, people often compare the average pension, which is higher for civil servants, without taking into account that civil servants normally have continuous careers and employment for life. Also, many civil servants are in higher positions than the average worker. A special situation in Germany is that of the retirement provision for so-called ‘free professions' like lawyers, notaries and the pay-as-you-go system.
Raffelhüschen and other critics are demanding a rise of the retirement age for civil servants parallel to the step-by-step increase to 67 in the first pillar. This measure would indeed help finance pensions over the long-term but it would not take the edge off cost spikes caused by the baby-boomers retiring and by the governments' hiring spree in the 1970s.