The German Institute of Pension Actuaries (IVS) has drafted a capital market-oriented concept to make occupational pension payouts more “flexible and attractive”, with fluctuations on capital markets balanced by a minimum guarantee.
According to IVS, legislators should allow Pensionskassen and direct insurance (Direktversicherung), two ways to offer occupational pensions in Germany, to pay out a higher amount of pensions at the start of a person’s retirement phase.
“The early retirement phase in particular can and must become more attractive. Then, it will become clear that lifelong pensions achieve a positive return on contributions much earlier than at 100 years [old]”, said Friedemann Lucius, president of IVS.
A lifelong pension is not a payout plan, but rather an insurance against the risk that the retiree runs out of money, he added.
According to IVS, the amount of pension paid out can increase or decrease depending on the development of investments, but never fall below a guaranteed minimum level.
“This also meets the needs of many people who don’t have problems with fluctuations [of investments on capital markets],” Lucius said.
“They would rather have a non-guaranteed pension of €140 a month, which fluctuates around that amount but can never go below €100, than a guaranteed pension of €100, which may rise to €160 in 20 years,” he added.
Currently, direct insurance and pension funds must use profits to increase pensions if the pension institutions want to relieve the employer from risks relating to adjusting pensions, IVS explained. This leads to low starting pensions, which only gradually increase through the allocation of profits, and are at the highest level when the pensioner dies, it added.
IVS has long campaigned for more flexibility in the retirement phase, but the actuaries’ proposals have not yet been included in the draft law to strengthen occupational pensions — Betriebsrentenstärkungsgesetz II – the reform put forward by the government.
“Apparently, there is still a widespread aversion to risks that a pension once paid can also decline again,” said Lucius.
The IVS is calling on the government to have more trust in stakeholders and give them the power to design new rules relating to the retirement phase in the upcoming reform.
The Institute has come up with the capital market-oriented concept on the payout retirement phase after criticising the fund industry association BVI for underestimating risks relating to lifelong fund-based pensions.
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