A select group of people have lent their names to the things that they had a hand in creating. Think of the Belisha beacon or the Litfaßsäule, the concrete advertising pillar popular on German streets.

Along with former Social Democrat labour minister Walter Riester, Bert Rürup, professor in financial and economic policy at the Technical University of Darmstadt, has given his name to a type of pension provision, the so-called Rürup Rente. This was the brainchild of the commission on pensions, health and long-term care that he chaired from 2002-03, and which also recommended the gradual raising of the retirement age from 65 to 67.

Just as every country supposedly has the government it deserves, every country also seems to be stuck with the social security and pensions system it has inherited. In Germany’s case this is a highly segmented system whereby different groups - general employees, officials and the self employed along with specially designated groups like farmers and miners - all have their own state pension arrangements.

Rürup has already previously described the German system as being “in the shadow of Bismarck”.

The two solutions that were introduced in 2002 following the reforms of the then labour minister Walter Riester were also heavily orientated towards those employed by a company. The reforms had introduced an element of private pension saving to replace income lost through pension benefit cuts that were being implemented in parallel.

“We have systems organised by occupation and we have made the error of organising the capital funded supplementary system by occupation as well,” as Rürup puts it.

There were initially two forms of state incentives for the 4% of salary that Germans were being asked to pay into a supplementary account. One was through an occupational pension with a salary sacrifice and tax relief, which favours higher earners, while the other was through the so-called Riester-Rente. This is a private, usually insurance based, pension savings scheme, which involves actual state lump sum incentives. It favours lower earners with children, since this group pays little or even sometimes no tax. But Rürup is proud of the fact that “his” Rürup pension is the first universal pension product, in that it is suitable for all types of worker, including the self employed.

Rürup, a familiar public figure in Germany since he is well known as the chairman of the government’s five-member panel of economic ‘wise men’, says he admires the pension systems of the Netherlands and Switzerland, both of which for differing reasons have an element of compulsion. He also warns that it is virtually impossible to apply the lessons of other countries elsewhere since the accretion of reform upon reform over the decades and centuries makes it impossible to implement anything approaching radical reform.

Riester once said that one of the reasons he shied away from introducing an element of compulsion into his reforms was that he was afraid of the reaction in the press and among voters. Rürup points out that the Germany’s parliament, the Bundestag, must decide once and for all, by the end of 2008 as foreseen in the original reform legislation, whether pension saving is to become compulsory. But he doubts that the country’s legislators will bite the bullet.

Another reason for the marked differences in European pension funding and provision are some deep-seated contrasts in the conception and roots of occupational pensions. These in Germany were introduced as a perk in the times of labour shortage in the boom years of the so-called economic miracle after World War II.

So a company pension was more of a company perk, aimed to attract and retain employees and to endow them with a limited lump sum, not to replace a large portion of their income as in the Netherlands, Switzerland and the UK.

“The starting point was the reform of the state pension system in 1957,” Rürup says. “This was conceived as one that provided comprehensive benefits, to guarantee in principle in retirement the purchasing power that one had in working life.

“The roots of occupational pensions are in the 1960s. But they rather fulfilled a corporate function rather than a social policy role, more as an instrument of company finance or in the area of personnel policy. The typical recipient of an occupational pension was a man who had worked continuously for a large industrial company.”

And so occupational pensions continued as a note in the margin in German corporate and government life until they were rescued from declining influence and importance by the Riester reforms of the first Schröder government early this decade.

But Rürup regrets that the major pension reforms enacted by the Kohl government in the early 1990s by the then labour minister Norbert Blüm did not go far enough. He promulgated the slogan “pensions are safe” but did not take the logical but politically difficult step of introducing a state-promoted capital saving incentive through tax relief or subsidies, one which would actually allow individuals to achieve the same income replacement level as under the old system.

This, he says, has led to a “lost” generation of those born around 1965, who had to bear the brunt of the benefit cuts of the early 1990s but who were not given the chance to make up the shortfall with state promoted provision.

“This generation does not have enough time in some cases to make use of the very generously incentivised private and occupational pension provision in order to compensate for these reductions.”

 

ürup’s commission coincided with the Turner Commission of the UK, and the two men met on occasion. “In Germany we are reforming pensions by scaling back the pay-as-you-go system and scaling up capital provision. In Great Britain there is a capital funding system and a pay-as-you go system, and it is this latter that is being scaled up so in 30 years the two systems will be the same,” he notes.

The 60:40 relationship between pay-as-you-go and capital financed systems is a good one and one that has been accepted, Rürup continues. “But there is no scientific answer as to the correct relationship between the two. The political world has done everything it can in the area of state pension insurance and further benefit cuts cannot be made.”

Rürup also says he expected that occupational pensions would play a greater role in the new pensions landscape introduced by the Riester reforms. “Originally it was expected that occupational pensions would be the most important form of provision. But this does not appear to be the case at the moment. So we have many more private Riester contracts and, interestingly, private provision dominates even though it is less efficient.” The point is that collective systems are more effective and achieve higher returns, he emphasises.

Rürup also says that Germany’s notoriously complicated pensions landscape could do with a degree of simplification. “We have five occupational pension vehicles and it is very difficult to gain perspective over this landscape, which is in any case very strongly orientated towards the needs of the employer and not of the employee. In my opinion we have two many vehicles,” he says. No more than three are really needed, he adds - an internal funding vehicle for book reserves, an external vehicle that could be an amalgamation of the Pensionsfonds and Pensionskasse vehicles, and the support fund (Unterstützungskasse) for higher earners.

“I would also prefer that the external vehicles were not compelled to invest according to insurance regulations,” he continues, referring to the Pensionskasse and its upper equity limit. “I would also prefer it if it were possible to invest more in equities in younger years and also to invest abroad. It is highly important to overcome home bias.”

And he would also go further by opening it up Riester to all earner groups, not just the employed. Some kind of bridging solution is needed to continue the generous relief on social levies such as health and unemployment insurance for payments to occupational pensions, which were due to be phased out from 2008 but which the current labour minister, Franz Müntefering has said may be retained.

“It is interesting that many low earners, like shop assistants at Aldi and Lidl, use salary sacrifice [for occupational pensions]. If that ends it will be a bitter blow for occupational pension provision,” notes Rürup. “An SPD that is in favour of the strengthening of collective systems ought to have an interest in this.”

Although he says the Riester reforms could, in hindsight, have been simpler, Rürup believes the 2002 reforms are working well. “[Riester] has been developed in stages and has not been operating for very long, but at the moment it is working very well too. And occupational pensions are working relatively well. If we look back to introduction of 401(k) plans in the US, after four years they had not yet enjoyed the success of Riester today. You must always bear this in mind, the expectations are high but if you look at other countries it has worked well here.”