Germany’s reform of its public and occupational pension system could see more than €400bn flow into the scheme over the next decade, following recommendations made in a report published on Tuesday by the country’s pension commission.
In an 80-page submission, the commission – Alterssicherungskommission – made 33 recommendations to the government as to how to reform the country’s public and occupational pensions.
If fully implemented, IPE analysis suggests the reforms could see capital inflows of more than €400bn across the pillars of the German pension system.
Among the key proposals, the commission recommended creating individual accounts as part of the introduction of a mandatory funded pension, based on Sweden’s premium pension model.
An additional contribution of 2%, on top of the current 18.6%, funded equally by employers and employees, would then flow towards individual accounts, which would allow for better leverage investment opportunities on the capital markets for retirement provisions, the commission said.
Contributions should increase gradually, by 0.5 percentage points annually for all age groups, with an ideal start date in 2028.
Under the commission’s proposals, savers would also have the option to choose between a limited number of investment funds offered by other providers if they prefer not to contribute to the public fund.
Potential inflows into the first pillar in the coming years would add to the €26bn-€56bn of annual net inflows that recent analysis by S&P Global Ratings suggested could be generated via the reform of private pensions after a transition period of one to two years.
Assets could also increase within occupational pension schemes, which the commission said should be expanded to offer “near-universal coverage”.
At present, half of Germany’s employees who are subject to social insurance contributions have an occupational pension, and only 40,000 have signed up for a defined contribution (DC) pension under the social partner model.
As such, the commission said that social partners should begin a dialogue this year to develop concrete measures to expand the occupational pension coverage.
These measures, the report added, should be underpinned as part of an overall legislative process.
Increased contributions
The €400bn figure is based on a study published by the Leibniz Centre for European Economic Research by Marvin Immesberger and Tabea Bucher-Koenen, one of the members of the pension commission. Its analysis suggested that the increased contributions could see individual savers gaining an additional €3,635 per person over five years, €9,054 in 10 – and up to €55,380 over the course of 45 years.
“With [the proposed increases in contributions], we are turning the tide, and pensions in the future can once again be significantly higher than current levels,” Bucher-Koenen said.
On the basis of approximately 46 million German employees, IPE estimated that the reforms could generate €167bn of capital inflows within three years – and as much as €416bn within 10.
The study also suggested that the real average median return would rise from approximately 4% after one-five years to approximately 4.6% after 35 years.
Moving swiftly
The German pension industry broadly welcomed the report, agreeing on the urgency of moving swiftly to capital-funded schemes.
The occupational pension association aba called for the immediate start of the social partners dialogue recommended by the commission for company pension schemes.
Aba shared the view that the near-universal coverage of occupational pension schemes is essential to achieve the targeted overall level of retirement provision of 70% of the income across three pillars as recommended by the commission, chair Beate Petry said.
Occupational pensions are “indispensable” for the expansion of funded retirement provision, she added.
The Trade Union Confederation (DGB), the country’s largest umbrella organisation of trade unions, reiterated its support for mandatory company pensions based on collective bargaining agreements.
“These [occupational pension] schemes already rely on capital market investment options and offer strong collective safeguards,” said DGB chair Yasmin Fahimi.
Fidelity International also spoke in favour of transforming the first pillar into a capital-funded system and of introducing auto-enrolment within the second pillar.
“It is positive that the commission explicitly cites both auto-enrolment models with opt-out, and a potential mandatory requirement for occupational pensions as reform options,” said Christof Quiring, Fidelity’s head of workplace investing.
“International experience shows that precisely these mechanisms can significantly boost the uptake of occupational pensions.”
Thomas Richter, chief executive officer of the fund industry association BVI, said there needed to be greater emphasis placed on capital funding within the statutory pension system so that it relied less on tax subsidies over the long term.
Capital-funded elements should also be further expanded in occupational pension schemes, while employer-funded contributions should be possible for private pensions in a retirement savings account from 2027, Richter said.
As the pension commission launched its report yesterday, German chancellor Friedrich Merz said the priority now was to implement the reform package put forward by the pension commission, swiftly and in full. “We cannot afford to single out or reject individual measures,” he said.
Germany’s Pension Commission report: what to know
As part of its 88-page report published yesterday, the Commission recommended setting a target across the three pension pillars of a pension level of at least 70% of income after tax.
The capital-funded elements of the pension system must be strengthened, a crucial step that the Commission believes will both stabilise and increase the overall level of retirement benefits.
Germany, the report noted, should look to those highly successful models in other countries where capital-funded elements enjoy broad acceptance – provided they are well-organised and underpinned by responsible, transparent governance.
The Commission further suggested introducing a mandatory funded pension component within the state pension system or gesetzliche Kapitalrente.
To achieve this, individual capital accounts should be established for contributors. Contributions should be centrally managed and invested in the capital market, along the lines of the Swedish pension model.
Members of the German national and state parliaments, and board members of public limited companies, should be included in the group of people subject to compulsory statutory pensions, the report said.
Concrete measures for implementation should be initiated this year via a dialogue between the social partners, so as to significantly increase the uptake of occupational pensions, particularly in sectors currently underserved.
The early retirement option should be abolished without deductions of pension entitlements for individuals insured over a long period of time.
The Commission further recommended making slight adjustments to the statutory retirement age after 2031 should life expectancy continue to rise.
The pension dashboard should be developed further to stand as a fully comprehensive information and planning tool. In addition, the Commission advocated for the development of a financial education strategy.
