IPE editor Liam Kennedy considers the German Pensionsfonds, 10 years since its creation in 2002.
It is said that more tax literature exists in German than in any other language. This may be true, but Germany's institutional investment set-up, as well as its five occupational pensions 'vehicles', seems almost as infuriatingly complex to the outsider as the country's fiscal system.
As complex as the system is, each of the pensions vehicles - they enjoy the unlovely term Durchführungswege in German - owes its existence to a peculiar system of circumstances and privileges. Pensionskassen, capitive mutual insurance companies, were adopted by some industrial companies; others used book reserves, which helped finance the country's SME sector during the post-war economic boom. Direct insurance contracts are useful for small companies, and support funds - Unterstützungskassen - are beneficial for higher earners.
The Pensionsfonds came along 10 years ago, at the beginning of 2002, as a defined contribution (DC) pension vehicle with two specific purposes, neither of which have been fulfilled particularly well. At that time, the SPD-Green coalition was conducting an industrial modernisation programme in which it promoted the unwinding of cross share holdings. It also wanted companies to fund their pension liabilities off balance sheet.
Secondarily, the Pensionsfonds was permitted as a vehicle to invest the 4% pension top-up earmarked for private savings as part of the Riester reforms.
It had quite a lot in its favour. Following the trend in the Netherlands and Switzerland, Germany was somewhat ahead of its time when it permitted prudent-person rules for the Pensionsfonds. Its sum-of-contributions guarantee makes it the nearest Germany has to pure DC.
But the Pensionsfonds was initially saddled with a punitive discount rate that made book reserve transfers unfavourable for corporates. The contribution rate was too low at 4% of the social security ceiling, and the vehicle was launched in the midst of the dot-com fallout, which made savers wary of risky assets - even though 2002 would have been a good time to buy equities.
Despite changes that made book reserve transfers more favourable, there have been relatively few takers, and the Pensionsfonds has assets of only €25bn - although the Bosch Pensionsfonds is the largest and most successful with €1.6bn. The lion's share of pension assets still resides in contractual trust arrangements: in other words, German industry has voted against the Pensionsfonds.
The Riester reforms of 10 years ago was intended to redress the curtailment of state pensions with a funded top-up. Since the Riester reform, there has been no further democratisation of the second pillar. As a result, Germany's second pillar punches well below its weight. It will take a further reform programme with vision to improve the situation - and this seems far off.
This story first appeared in the April issue of IPE magazine