GERMANY - The government has ruled out the possibility of private saving for retirement in Germany becoming mandatory, saying its pension reforms of 2001 and 2004 should be sufficient.

To encourage saving for retirement, the government created Riester Rente in 2001 - second and third-pillar pensions that qualify for government subsidies.

But demand for Riester has been far below expectations. While the market for the third-pillar pension is estimated at 30 million people, only 4.2 million have signed up for it so far. The second-pillar version of Riester has also flopped in corporate Germany.

This led Franz Müntefering, chairman of the ruling Social Democratic party, to tell a party newspaper last week that the government “may have to consider making retirement saving obligatory,” if Riester did not catch on.

A spokeswoman for the German social affairs ministry said, however, that the government had no such intentions. She said that following simplification of Riester last year, “we believe that the pensions will experience a renaissance in 2005”.

Under last year’s pension reform, known as AEG, the second- and third-pillar versions of Riester were greatly simplified. Regarding the second-pillar in particular, employees gained greater portability of their Riester pension and criteria for government subsidies for it were streamlined.

Regarding the third-pillar, Riester savers were permitted to withdraw up to 30% of their savings in a lump sum when they retire. This version was further simplified by requiring a single application for government subsidies and not requiring any limits on monthly payments.

The social affairs ministry’s optimism about Riester was shared by the German insurance industry association GDV. “We certainly agree with the ministry that Riester will experience a renaissance this year. People in Germany are beginning to understand the need to save for retirement,” said Michael Gaedicke, spokesman for the Berlin-based GDV.

Germany’s insurance industry has benefited more from Riester than its asset management industry. For example, 3.5 million of the 4.2 million Riester contracts are insurance-related, according to GDV.

This is one key reason why Germany’s fund industry association BVI remains unconvinced of Riester’s virtues. A spokesman said that despite AEG, Riester still remained far too complex to promote saving for retirement in Germany.

The BVI is currently lobbying the German government to adopt its own retirement savings plan, which is similar to individual retirement accounts (IRAs) in the US.