Germany should introduce auto-enrolment in occupational pension funds and make voluntary private pension plans more attractive to improve pension coverage in the country, the OECD has said.
Other recommendations, made in a Germany economic survey report, include indexing the statutory retirement age to life expectancy, removing barriers to the portability of civil servant pensions and strengthening the supervision of employers’ direct pension commitments.
Occupational pension plans already exist in Germany as a means to supplement public pensions, but employees have to choose to participate rather than being enrolled by default, as is the case in Italy and now also the UK, for example.
The OECD said “substantial” coverage gaps remained despite the German government’s having introduced the Riester-Rente, state-subsidised voluntary individual private pension plans, and encouraged the expansion of occupational pensions.
“There is considerable scope to reform and expand supplementary private pensions,” said the organisation, noting that insights from behavioural economics and evidence from other countries suggest automatic enrolment improves pensions coverage.
“Such automatic enrolment could be complemented with the introduction of a fall-back pension fund, which offers a low-cost investment instrument to those firms and individuals that do not wish to make their own arrangements to save for complementary private pensions,” said the organisation.
It flagged the government’s plans to promote occupational pensions through collective agreements among social partners but said automatic enrolment was a broader approach and one the German government should consider.
“Automatic enrolment would boost occupational pensions, especially among workers in small firms,” said the OECD.
“The small firms could co-ordinate and provide occupational pension schemes collectively – for instance, at sector level, as is done in Switzerland and in some sectors of the German economy.”
The OECD’s recommendation for auto-enrolment has some parallels with a reform proposal by three ministers in the state of Hesse, for a “Deutschland-Rente”, although the OECD does not refer to this proposal.
The OECD also called for supervision of book reserve schemes (Direktzusage) “to better understand the macroeconomic and microeconomic risks they entail”, saying the systemic risk from direct commitments could be reduced by requiring companies to invest part of employees’ pension contributions externally.
It suggested making contributions to what it referred to as “the mutualisation scheme” risk-sensitive.
The “mutualisation scheme” refers to Pensions-Sicherungs-Verein, an association that insures corporate pensions against insolvency.
A company’s equity could determine the level of risk, the OECD said.
It recommended cutting the operating costs of the Riester-Rente, by improving comparability among providers.
Another suggestion was to amend the pension system for civil servants to extend rules limiting losses in pension claims civil servants incur if they move to a private sector job.
An old-age payment (Altersgeld) designed to do this is only available to federal civil servants – the OECD has recommended this also apply to civil servants in the Länder, the federal states.
“In the long run,” it added, “barriers to the portability of civil servant pensions could be eliminated by merging or harmonising the pension scheme for civil servants and the general public pension system, as most OECD countries have done.”