A member of Germany’s pension commission has stressed that any capital-funded first pillar should be underpinned by robust governance, warning against using pension assets to pursue political objectives.
Tabea Bucher-Koenen, a member of the commission that recently proposed sweeping pension reforms, said the aim of a mandatory funded public pension should be to build a broadly diversified investment portfolio focused on securing retirement benefits, “not investments in politically desired projects”.
Speaking during a webinar organised by the Leibniz Centre for European Economic Research (ZEW), she said: “I think that a portion of the capital [in the reformed first pillar] should also be invested in Germany and Europe, but the criteria used to choose investments should not be political, and this is an important point where the governance structure will be incredibly important.”
Her comments come amid discussions about using assets in a reformed first pillar to finance “all kinds of critical infrastructure projects, and that should not be the case,” she added.
Under the commission’s proposals, members would also be able to select private providers instead of the state-run default fund.
The commission recommends using existing institutions for asset management, co-chair Constanze Janda said during the webinar.
The Bundesbank and Germany’s nuclear waste fund, Kenfo, have both been mentioned as potential managers of the assets.
During the previous legislative period, Kenfo held discussions with the government about managing an equity fund intended to help limit increases in pension contributions, although the proposal was ultimately abandoned.
The Bundesbank already manages pension assets for several federal states, the reserve funds of the Federal Employment Agency (Bundesagentur für Arbeit), and pension provisions for civil servants.
“We currently have around €140bn invested in capital markets on behalf of public-sector clients. We are positioned to invest additional government funds,” Bundesbank vice president Sabine Mauderer said in an interview with Tagesspiegel.
Effective competition
Martin Werding, also a member of the pension commission, told IPE that implementation of the capital-funded first pillar, based on Sweden’s premium pension model, should begin as soon as possible because its benefits increase with a longer accumulation period before retirement.
The Swedish-style model offers high-return investment options, low costs, strong governance, independent fund management and effective competition between providers and the state-run default fund, he said.
The commission recommends that asset management costs should not exceed 10 basis points of assets under management, equivalent to annual costs of no more than 0.1%.
“In the medium to long term, this allows pension levels for younger insured individuals to rise again,” Werding said.
The commission also recommends that social partners decide whether to introduce automatic enrolment into occupational pension schemes.
“The rules governing occupational pensions should be comprehensively reviewed to ensure they remain modern and attractive, following the introduction of the capital-based pension, and the reform of private pension provision in spring,” Werding said.
