Funded pensions must prop up first pillar as wages stagnate: Rürup

Pay-as-you-go (PAYG) pension systems have to be topped up by funded pensions due to a lack of wage inflation in OECD countries, according to German pensions expert Bert Rürup.

In a keynote speech to journalists in Vienna this week, Rürup said: “As wage levels are effectively dropping we need alternative sources to finance pensions.”

With lower wages, contributions to most PAYG first-pillar pension systems were also dropping, leading to less capital for current payouts and raising the prospect of future pension cuts.

Additionally, especially for countries like Austria, people were paying into the state pension system for shorter periods as their education was taking longer, Rürup said.

“In light of all this it makes sense to expand funded pension systems,” he said.

However, he warned not to play off PAYG and funded systems against each other: “Having the systems compete against each other does not work. That has been tried with the Riester-Rente in Germany until about five years ago. Cooperation is the key.”

According to Rürup, one of the initial problems with the state-subsidised supplementary Riester-Rente was that it had been set up to replace people’s pension payouts from the first pillar without making it mandatory to join a Riester plan.

He emphasised that funded systems made sense in the current low interest rate environment for two reasons: “With a funded system you can also source the economic output of other countries not only your own.”

Rürup added: “Further, I predict the low-interest rate to [end] in 2019 but it should not happen too quickly.”

“The low interest rate scenario is not very sexy for funded pension systems – especially if they are insurance-based,” he continued. 

Rürup called on insurers to “emancipate” themselves within the regulatory framework by shifting asset allocations away from government bonds.

He said: “Solvency II is a platinum credit card for countries and this is a problem. But financially sound insurers are emancipating themselves from this by investing in equities or infrastructure.”