German stakeholders group issues recommendations for third pillar reform

The Fokusgruppe Altersvorsorge, a group of stakeholders set up to propose reforms for the third pillar pension system in Germany, has recommended offering savings accounts to invest in funds, but also in asset classes, including private equity and real estate, to achieve higher returns for savers than Riester-Rente contracts.

It “makes sense”, according to the group of experts, to seize investment opportunities in such asset classes and also to reduce costs, the group said in a reform proposals report published today.

Higher returns on investments are linked to reducing guarantees on fund products and pure unit-linked insurance products, including a reduction of contributions paid out as promised, it added.

Life cycle concepts can, on the other hand, reduce investment risks with increasing age, and collective savings models can rebalance capital market fluctuations over time, making retirement income more predictable, it added.

The focus group is recommending reducing costs on products and simplifying bureaucratic tangles for third pillar products through simple and inexpensive switching options, reinforcing competition between providers in the savings phase.

According to the report, the reform should lead to offer transparent, easy-to-understand, therefore accessible subsidised third pillar pension products, improving their quality, and strengthening financial education on pensions.

The information on the products, both in the savings phase and in the payout phase, have to be accessible digitally on a platform, and reports on costs would comply with European standards Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, it added.

Retirees would be able to decide whether to withdraw their savings in one go, for example to renovate a property, or flexibly over time, bypassing limits of the statutory retirement age, it said.

Existing rules on Riester-Rente products already allow withdrawals of up to 30% of saved capital as a one-off payment at the beginning of the pay-out phase.

In the future, private pension products should be open to all employees, but spreading them to eligible groups and to self-employed will take place when a mandatory first pillar membership, with opting-out option, will be introduced.

The focus group has recommended to offer third pillar products with subsidies targeting particularly lower income groups, young people, parents of children, and young adults in training.

A possibility to support lower income groups would exist through a matching contribution system in which the subsidy rate depends on the amount of own contributions, according to the report.

The offering of home ownership subsidies (Wohn-Riester) should no longer be specified as mandatory, but only optional, on a voluntary basis through banks financing residential properties (Bausparkasse).

Challenges to the distribution of third pillar products in Germany are posed by the costs of Riester-Rente contracts, weak competition among providers, and limited amount of comparable offerings, impacting mostly women and people with little financial literacy, according to the group.

The number of Riester-Rente contracts have stagnated in the last decade in Germany, declining in the last few years to 15.893, according to figures published by the Federal Ministry of Labour and Social Affairs (BMAS).

Studies have shown that especially families with children, people with higher education or professional qualifications sign up for Riester-Rente contracts, and are lower among people aged between 25 and 35 years old.

Public pension fund’s plan sparks discussions and disappointment

The focus group, under the leadership of the Ministry of Finance (BMF), included representatives of the Ministry for Labour and Social Affairs and the Ministry for Economic Affairs (BMAS), BaFin, the Bundesbank, and the Federal Ministry for Economic Affairs and Climate Protection (BMWK).

Additionally, the insurance association GDV, the Investment Funds Association (BVI), the occupational pensions association Aba, the Confederation of Employers’ Association (BDA), trade union Deutsche Gewerkschaftsbund (DGB), the Federation of Consumer Organisations (vzbv), Stiftung Warentest and academics took part in the discussions.

The group had the task of examining, based on plans laid out in the electoral programme of the traffic-light coalition of Social Democrats (SPD), Greens and Liberal Party (FDP), the possibility to set up a public fund to offer private pension products with an opt-out option, the legal recognition of private products with higher returns than Riester-Rente, and discussing incentives in the form of funding for low-earners.

Particularly the possibility of setting up a public fund with an opt-out option has raised fierce discussions among stakeholders.

A majority of the members in the group rejected the plan to establish such a fund, with BMWK describing the choice as “regrettable”.

Furthermore, vzbv had pitched the idea of the Extrarente, a publicly managed pension fund with an opt-out option to respond to the pressing issues of the distribution of the products, higher costs and low returns.

A number of stakeholders in the group believed that such a fund suits the mandatory, state-organised first pillar, and the idea of the equity fund within it (Generationenkapital), while in the second pillar the social partner model already looks at higher returns on investments through pure defined contribution plans with buffer mechanisms, according to the report.

The occupational pension association Aba “very much welcomes the fact that a clear majority of the focus group is against a public pension fund”, said chair Georg Thurnes.

“A solid statutory pension, company pension schemes that have been strengthened in line with our proposals, and the further development of private [pension] provisions are enough to make the pension system in Germany fit for the future,” he added.

Experts in the group are also endorsing a certification process to approve eligible, private pension products, possibly through a tender like it happens in Sweden.

The German fund industry association, BVI, insurance association GDV, and vzbv have brought to the table their proposals of the Fondsspardepot, Bürgerrente and Extrarente.

BVI proposed a fund savings account with tax incentives, a so-called “special custody account” for saving plans with a minimum term of up to the age of 60. Returns on investments conducted through savings accounts in funds are free of taxes, even in case of reallocations within the account, according to BVI.

In a statement, BVI said that it welcomed the focus group recommendations, the idea of dropping guarantees, structuring the payout phase flexibly, and setting up retirement savings accounts.

Thomas Richter, the chief executive officer of BVI, said the focus group report was a “paradigm shift” for private old-age provisions.

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