Walter Reister, the federal minister who has revitalised pensions in Germany, answers questions put to him by Investment & Pensions Europe
In deciding that action had to be taken to reform Germany’s pension system, what were the main objectives you had in mind?
Riester: The pension reform has two central objectives: for younger people who are paying contributions it guarantees a stable contribution rate, and it ensures that they will receive adequate benefits in old age. But statutory pension insurance will nevertheless remain the central element of pension provision. Younger people will continue to finance older people’s pensions with their contributions, and at the same time will cover their complementary social provision. The contributions, half of which will be paid by employees and employers in Germany, will not exceed the 20% level until 2020 and the 30% level until 2030. The second element, which is new, is the supplementary pension provision. In future, anyone making additional savings for his or her old age will receive bonuses and tax concessions from the State. Entirely for their own personal gain.
What do you see as being the key elements within the new pensions scene that your administration has introduced?
R: The central element is the supplementary pension provision. This will be built up in stages, starting this year with 1% of gross income, and rising in the final stage in 2008 to 4% of gross income. In order to make this system attractive to as many people as possible, these savings for old age will receive support from the government. For 2008, over €12bn will be provided in the budget.
What do you regard as the underlying philosophy or approach to the reform (for example more individual responsibility for pension provision/ more shared responsibility)?
R: The concept is certainly based on the fact that everyone will have to take a little more personal responsibility. But we have been very moderate in our pursuit of this. On the one hand, pension provision products subsidised by the government will have to meet certain criteria, as we’re talking about a pension provision that makes it essential to provide security for the individual. On the other hand, we have created the greatest possible transparency for policyholders. So one of the criteria for the private Riester contracts is that the initial costs, and how they are allocated, must be clearly indicated in each individual contract. But at the same time, with our pension reform we have created the right conditions for everyone in future to know just how much his or her pension ‘account’ is worth at any one time. After 2004, the pension underwriters will automatically send this information to each person. This means that in future everyone will be able to estimate how his or her standard of living might look in their old age.
To what extent did the reforms taking place at the European level – notably the new pensions directive proposals from Brussels – have an impact on your thinking, particularly in relation to the new Pensionsfonds concept?
R: The Pensionfonds is something we have introduced as part of the company pension scheme. When we were setting this up, to a large extent we were guided by the principle of ‘investment freedom’. This means that in relation to the Pensionsfonds, Germany is changing to a consistent application of the ‘prudent person principle’, which will be a recommendation of the draft directive under discussion at the European level. We feel that this European draft directive, which we very much welcome, bears out our thinking on this issue.
Are you pleased with what has been achieved so far? If so, in what way?
R: I’m very pleased. At the moment I am also receiving a great deal of support, both from the insurance companies for private pensions, and from employers and trade unions for company pension schemes. The ‘Riester pension’, named after me, is doing very well. In the private sector, in the first three months alone some 2m people have taken out contracts for a supplementary pension provision. In the company pension sector, we are expecting a genuine renaissance, as we have organised them in a highly attractive way, after they had more or less fallen into oblivion for years under the CDU government. Now there are already a considerable number of collective wage agreements that incorporate provisions for subsidised supplementary pensions. These cover more than 16m people in employment who can therefore benefit from them, and the numbers are rising daily.
There has been criticism regarding the implementation of the new system. How would you answer these critics? – firstly, in relation to criticism of the individual Riester pension plans? Secondly, in relation to pension provision through workplace arrangements?
R: We have recently held a discussion forum on the Riester pension, where a business psychologist indicated that in many people’s minds the word ‘pension’ is associated with old age and illness. That causes people to worry, and explains why someone like me, who is tackling this issue head-on, is having to put up with a lot of criticism.
I have stood up to this criticism, and it has been worth it. For the private pension contracts, we have established 11 criteria, all of which are in the interest of consumer protection. The most important of these are that the capital paid in must be guaranteed, and that payments will have to be safeguarded only when a person enters his or her 60th year with lifetime pension payments or with a payment plan. I still take the view that we cannot dispense with any one of these criteria. Customers themselves will find it very easy to take out such a contract. All they need are three pieces of information: marital status, number of children and income in the last year on which social security contributions were paid. But the criteria do not constitute any sort of obstacle for the providers, either. There are now more than 3,500 contracts that have been developed by them and certified, and which can therefore be subsidised accordingly.
Right from the start, company pension schemes have been much less controversial, as the products on offer are very attractive. Everyone involved in this area recognised that the pension reform would bring considerable advantages, especially in the company pensions sector.
What changes do you think still need to be made to make all the changes work smoothly together in an integrated way?
R: The individual elements of this concept have been carefully harmonised. By overlapping the different components of the pension reform, we can guarantee a contribution rate that will not rise above 20% by 2020, and above 22% by 2030. What we now have to work on is to make it clear to people just how important it is to take some measure of personal responsibility. Much has already been done within my organisation. For example, we have distributed over 6m inserts in popular magazines, we have taken part in numerous specialist broadcasts and on television, we have set up a citizens’ telephone helpline, and of course we have had information brochures produced. But it is also evident that one ministry cannot undertake all this educational work alone. So we have also called on financial service providers and independent consumer advice centres, as well as the media.
One problem that we are really having to contend with is the fact that some aspects of what is actually a very good reform – and people are continually telling us that it is – are being talked down in public. Certainly there are points for debate, but I can deal with those if they cause consumers to worry. That is irresponsible.
Do you think Germany now has an efficient pensions system that enables German employers to meet the competitive challenges they face in the global market?
R: I certainly believe so. The models for company pension schemes in particular offer considerable benefits for both employees and employers. I regard it as all-important, firstly, that the provision models should also be very attractive for employers, as a result of the tax concessions and the savings in social security contributions, which will still be in place until 2008. And secondly, an attractive pensions system is also a good argument for businesses to recruit good employees and to keep them in the company. That enhances competitiveness.