The Bundesrat, the constitutional body representing the German states, has warned that the draft law put forward by the government to reform the first-pillar pension system is insufficient to place the pay-as-you-go system on a financially sustainable footing in the long term.

The government’s proposal fails to secure the financial stability of the first pillar, and to fairly distribute the burden to support the system, against a backdrop of an ageing population, the Bundesra said in a statement.

A “fundamental pension reform” is necessary to protect the interests of pensioners and those of the working population from a potential increase in contributions, it added.

The reform package II – Rentenpaket II – proposed by the government foresees keeping the level of pension at 48% of the average wage until 2039, a measure that the Bundesrat approves of, and set up a generational capital fund for equity investments to slow down the increase of contributions.

The body welcomes the idea of funding statutory pensions, noting, however, that the generational capital fund can only make a marginal contribution to relieving the burden on the working population.

The income generated by the fund from 2036 onwards cannot cover the higher expenses to keep the level of pension at 48% of the wages, it added.

The Bundesrat also doubts that assets amounting to at least €200bn, planned for the fund, will be available by 2035, and whether paying €10bn per year to the first-pillar manager, Deutsche Rentenverischerung, is feasible without touching the “fund’s foundation”, it added.

It has demanded that the possibility of channelling members’ contributions towards the generational capital fund is ruled out.

The Bundesarat has, instead, called for an assessment in a further legislative process whether the introduction of requirements to build pension provisions for all self-employed who are not already subject to mandatory coverage can be linked to the current proposal to reform the first pillar, to modify the rules as quickly as possible.

The coalition agreement between the Social Democrats (SPD), Greens and liberal party FDP, valid until next year’s general elections, foresees the introduction of an obligation for self-employed people to sign up for a private pension product with an opt-out clause, unless they are insured under the first-pillar scheme.

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Luigi is IPE's Berlin-based DACH correspondent. His coverage includes regulation and the latest pensions and investments trends, and, being a native Italian, he also covers Italy’s pensions market. He has reported from Italy and Germany on international politics and business for European and US publications including USA Today, Bloomberg BNA and for the investigative magazine L’Espresso. He was previously Germany correspondent for Mergermarket covering M&A.View full Profile

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