The German parliament (Bundestag) has approved a private pension reform aimed at increasing savers’ exposure to equities while reducing costs.
At the core of the reform is the creation of a retirement savings account (Altersvorsorgedepot), allowing individuals to invest in equities, funds and exchange-traded funds (ETFs) at lower cost, with the aim of improving long-term returns.
The legislation increases support for low earners, introduces a cap on product costs, and broadens eligibility for private pension products to include the self-employed, according to a parliamentary note.
The new products will be available from 1 January 2027, when the reform takes effect, and can be offered by banks, insurers, fund managers and custodians.
Providers will be able to offer products both with and without guarantees on contributions. Guarantees, while offering downside protection, are typically associated with higher costs and lower expected returns.
The law also introduces a state-backed standard product with effective costs capped at a maximum of 1%.
A citizens’ petition had called for a 0.5% annual cost cap across all subsidised products, rather than applying only to the public standard product.
Competition with second pillar provision
The reform replaces the state-subsidised Riester pension introduced in 2002, which has faced persistent criticism over high costs, low returns, complexity in accessing subsidies, and limited transparency.
The number of Riester contracts has been declining since 2018, falling to around 15 million at the end of 2024, according to the Bundestag’s finance committee report on third pillar reform.
Occupational pension experts have warned that the new framework could intensify competition for second pillar schemes, particularly as private products without guarantees gain traction.
“Small and medium-sized firms could opt to pay an additional contribution for employers who want pure defined contribution (DC) model as private pensions, without carrying liabilities. This situation could also lead to the elimination of guarantees in hybrid DC plans,” said Christof Quiring, head of workplace investing at Fidelity International.
The occupational pensions association, aba, said incentives for employers to offer company pensions could weaken under the new legislation, particularly among small and medium-sized enterprises.
According to aba, the expansion of private pensions risks undermining company pension schemes and could run counter to efforts by social partners to strengthen DC arrangements within the second pillar.
The German Investment Funds Association (BVI), meanwhile, welcomed the reform overall but criticised the introduction of the state-backed standard product.
“When administration and sales [of products] are cross-subsidised with taxpayers’ money, fair competition with private providers is impossible. Large parts of the German political establishment clearly struggle with the principles of a market economy,” said BVI’s chief executive officer Thomas Richter.
Moreover, according to Richter, if markets collapse, private pension holders expect the state to compensate their losses.
“Ultimately, policymakers are not only under pressure to payout savers in ‘their’ state-run product, but effectively all private retirement savings – with all the consequences for the federal budget. A politically ill-conceived and misguided approach,” he said.
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