As a senior civil servant at the Finance Ministry in Berlin explained to me over 15 years ago at the time of the 2002 Riester pensions reform, German long-term savings policy has often sought to balance the interests of insurers and asset managers, the two main provider groups. It also needs to understand the needs of the German working population.
This year’s law introducing a form of pure DC pensions for the first time – albeit heavily marketed as collective, or target, DC – is a response to the need to boost occupational pensions. German civil servants probably looked over the border at the Netherlands and its sector pension funds, and sought to transplant them to Germany in DC form. The aims are laudable.
The previous Christian Democrat-led coalition deliberately passed the somewhat contentious law ahead of last month’s election, leaving a clean slate for implementation in 2018. The new concept does not create a new type of pension; rather, it creates a design option that can be implemented within one of the three main funded vehicles – Pensionskasse, Pensionsfonds and direct insurance. As insurers tend to predominate in this sector, asset managers will have to be nimble and probably seek partnerships to gain market share.
The main challenge will be demand, not competition with the insurance sector to be the providers of choice. Germany’s policymakers are essentially seeking to boost long-term savings with the higher-octane fuel of greater equity allocations. But people will have to want this if the concept is not to wither.
And then come the gatekeepers. It will not be possible simply to offer pure DC products direct to employers. Just in case anyone got too much of a headrush on equities, the social partners will be the key intermediary and the new plans will only be available through sector labour agreements (so-called Tarifverträge).
Yet German unions have traditionally been reluctant to embrace occupational pensions. In any case, they have traditionally been a white collar perk, rather like a company car, providing a small income top-up in retirement.
MetallRente – a poster-child occupational scheme set up in the wake of the Riester reforms of 2002 – is the kind of sector pension fund the 2017 reform is intended to stimulate. Yet of its €5.1bn in assets as of the end of 2016, only €150m was invested in the riskier Pensionsfonds vehicle. Most contributions go to the more conservative direct insurance (Direktversicherung) vehicle. This does not augur particularly well for the pure DC concept.
There is a strong risk that this reform becomes neither a stunning success nor a stunning failure, but just adds to the complexity of German workplace pensions without offering any real solution to the problems of an ageing society, stretched public finances and a need for secure retirement income.
Liam Kennedy, Editor