Germany’s old Riester-Rente supplementary pension system needs to be “fundamentally reformed” and could be better organised with a state fund modelled on Sweden’s AP7, according to the German economic think tank DIW Berlin.
Under the Swedish premium pension system, citizens pay 2.5% of pensionable salary either to a state fund or to a private fund option on a state backed platform. Returns on private pension products are higher than those of many Riester contracts in Germany, albeit without guarantees, DIW Berlin’s study said.
DIW Berlin concluded the Riester-Rente has failed to function as an effective supplement to the state pension system since its introduction following extensive reforms in 2001.
Only around 25.3% of the working population, or 12.9 million people, had signed up to a Riester contract as of last year.
Around 300,000 received a pension benefit from a Riester contract last year, with an average gross monthly pension of just €83.
Without annual state subsidies of €4bn the number of people with a Riester contract would likely be significantly lower, DIW Berlin added.
Employees with a university degree (36%) or in management positions (42%) most often sign up for a Riester contract, against only 11% of unskilled workers and 10% of the unemployed.
The study also noted that adoption of Riester-Rente corresponds to income: low-wage earners are below average Riester savers, while property owners tend to sign up for Riester contracts more often (31%) than tenants (20%).
Low earners and unemployed people could be guaranteed the repayment of mandatory contributions. The state could also subsidise contributions for low earners and the unemployed, the study suggested.
An opt-out clause to exit the pension contract could also be an option under a new private pension model, albeit with the risk that those more dependent on private pensions would receive reduced benefits in retirement.
Another job for the next government
Germany’s grand coalition CDU/CSU and SPD failed to deliver the reform of the third-pillar pension system Riester-Rente.
The Ministry of Finance told IPE in a statement that “very different views and proposals” on the future of tax-subsidised private pension provisions persist, despite the efforts of the government to open a dialogue with Riester-Rente providers, consumer protection associations and social partners to find a solution.
The three parties now sounding out the possibility of a so-called traffic-light coalition – Social Democratic Party (SPD), the Greens and the Free Democrats (FDP) – acknowledge that the Riester-Rente needs a makeover.
The SPD has put forward the idea of a new standardised private product that is inexpensive, digital and cross-border, based on the Swedish model, also offered by a public institution. The results achieved by the Riester-Rente are so far “unsatisfactory”, the SPD said in its electoral programme.
The Greens would replace the Riester-Rente with a state fund, or BürgerInnenfonds, that would invest with a long-term view in line with ESG principles.
The FDP instead would introduce a retirement savings account combining the Riester-Rente, the Rürup-Rente in a US-style 401(k) account, it said in its electoral programme.
The party would also change investment rules for state-backed pension products, including Riester contracts, to allow savers to decide the mix of returns and risks and the forms of investment.