CFA Society Germany, the association of investment professionals, has proposed the merger between the country’s occupational and private pension systems under a format based on models in place in Sweden and Canada to cut administrative and sales costs that would lead to an increase in the level of pensions.
The models would cater for two different market segments, one including savers opting for a standardised, state-run pension product, and another for savers who demand control over investments, the association said in a paper on the reform of state-subsidised pensions in Germany.
The CFA mentioned the ITP/Collectum model, the system for private sector employees in Sweden, as a central, state-run platform for standardised products that could be offered in Germany by Pensionskassen and life insurers.
The providers of pension products on the platform are picked through a tender process under the Swedish Platform Collectum model.
Pensionkassen and life insurers in Germany would compete through tenders to offer occupational and private pension products on the platform open to the public and operated as an institution under public law with the government responsible for it.
They would be responsible for asset allocation and investment management, reporting, payment of pension benefits, offering products for a lifelong annuity, and giving the option to change employer free of charge, according to the paper.
With the new system, administrative costs would fall for the third pillar Riester-Rente from 1.5% to 0.4% of the assets, and costs from 4% of total contributions when closing a contract, to a commission of 1% of contributions, and in turn the level of pensions would increase, the paper added.
The CFA has suggested instead the Registered Retirement Savings Plan (RRSP), combining occupational and private pensions in Canada, as the model suitable for people who want control over savings and investments.
Under the model, retirees can opt to open an account for private or occupational pensions at a bank that would offer a wide range of investment products and tax-deductible contributions.
The product would become a “tax-neutral pension product” at retirement age, the CFA explained in the paper, with retirees withdrawing an annual or monthly percentage of pension assets.
A strict separation
Its position paper, for which the CFA conducted research on second and third-pillar pension models in 11 countries worldwide, concluded that the split between occupational and private pension systems is far less strict in many other countries than in Germany.
The German pension system would become more flexible, transparent and fair, if it is open to the wider public through flexible subsidised contributions, and offer portability when changing employers and providers, the paper stated.
Employers should automatically sign up employees for occupational pensions when they join a company and pay part of their salary as a contribution if employees do not decide to opt out within a short period of time, according to the CFA.
Company pension schemes are not taking off in Germany, especially in small and medium-sized firms where only around 30% of employees has signed up for an occupational pension, and despite a law introducing pure a defined contribution option (Betriebsrentenstärkungsgesetz), while Riester-Rente contracts have stagnated at 16m members for years.
The Betriebsrentenstärkungsgesetz, a law specifically approved to strengthen company pensions, excepts employers from guaranteeing a minimum amount of pensions, freeing up capital for investments in riskier asset classes such as equities.
Exposure to more profitable asset classes, coupled with financial education, would also increase the acceptance of investments in stocks by the public, the CFA said.
A pension system geared towards investments in equities would give “significantly higher pensions” than direct life insurance or Riester-Rente, it added.
Annuity pools in the payout phase, offering a lifelong pension but allowing investments in profitable asset classes during the payout phase, could also lead to pension increases, the paper added.
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