Norbert Blüm, a former Conservative labour minister, once committed one of Germany’s best-known political gaffes by claiming that the state pension was “secure”.
While Blüm had good intentions – meaning to say that payment of some pension was guaranteed – he probably should have realised that his remark would be taken as a bad joke by his fellow Germans.
To them, the state pension is anything but secure. Following a demographics-related reform engineered by Blüm himself in 1997 and another one last year, the maximum benefit, which used to be generous, will sink to 43% of a previous salary from 2030 from 52% now.
Meanwhile, owing to high unemployment and minimal wage hikes, Germany’s 20 million pensioners saw the level of their benefit frozen for the second consecutive time this year and are likely to see another freeze in 2006.
On top of all of this came the government’s admission in July that for the first time in 20 years, the state-run, pay-as-you-go (PAYG) pension scheme had to be bailed out with a €500m loan. The bail-out was prompted by sharply lower revenues caused by the high unemployment.
Given that the state scheme is extremely fragile, one might expect that Blüm’s party, the Conservative CDU/CSU, will further strengthen it now that it has returned to power after seven years in opposition. On September 18, the CDU/CSU narrowly beat the incumbent centre-left Social Democrats. The close result compelled the two parties to form a coalition government with CDU/CSU boss Angela Merkel as Germany’s first female chancellor.
However, what the CDU/CSU had to say about the state scheme does not bode well for major reform. Indeed, in its election manifesto the party seemed to ignore the fact that there was a problem at all.
Instead, the CDU/CSU was content to promise households with children a rebate on their statutory pension contribution, a move that will stretch the scheme’s finances even further. With respect to corporate and private pensions, which Germans need to compensate for their shrinking state benefit, the CDU/CSU said they would be further boosted, but didn’t say how.
On the other hand, the revelation that the SPD will take charge of a newly-merged labour and social affairs ministry could provide an impetus for major pension reform. Consider that in 2001, when Walter Riester was the SPD’s labour and social affairs minister, historic pension reforms were hatched. These reforms were decisive in establishing second and third pillar pensions. Now we have to see what approach Müntefering will take, if he ends up with pensions in his portfolio.
In any event, Andreas Storm, the CDU/CSU’s pensions spokesman in parliament, denies that his party had treaded too lightly on pensions. In an interview with IPE, he noted that following three major pension reforms since 1997, a great deal had been done to improve matters.
“Norbert Blüm’s reform and last year’s Alterseinkünftegesetz (AEG) addressed the problem of demographic change, while the Riester reforms gave rise to the second- and third-pillar. What’s needed now is a fine-tuning of these reforms, and that is what we proposed in our manifesto,” Storm said.
The CDU/CSU parliamentarian also stresses that the best way to shore up the state pension scheme is to get the German economy going again and bring down unemployment, which is currently at 11% of the workforce. To achieve these aims, the CDU/CSU plans to reduce non-wage labour costs for employers and make Germany’s labour market more flexible.
Storm’s view that major pension reform is not needed in the next legislative period ending in 2009 was supported by Professor Bert Rürup, the government’s chief economic adviser and a leading pensions expert who helped craft last year’s AEG.
“The reforms will, in 20 years, transform the state pension from a main source of income for retired people to a basic one, so I don’t think we can go any lower than that right now,” Rürup said in a interview at the University of Darmstadt. “The challenge for the new government is to make people fully understand what has happened with the state pension and that they have to save more on the corporate and private level.”
Following the Riester reforms of 2001 Germans have had plenty of opportunity to do so. The reforms gave employees the right to a defined contribution (DC) plan that their employers may elect to subsidise. The DC plan, like a third-pillar pension brought forth by the reforms, is tax-privileged, though its exemption from social tax is to expire at the end of 2008.

Yet despite generous tax subsidies and the financial industry’s best efforts to sell them, demand for Riester pensions remains below what it should be to make up for the crumbling first pillar. The underwhelming performance of Riester is also why many asset managers, and some investment consultants, contend that a true boom in pensions has not materialised in Germany yet. Their business, they say, is being driven by a redistribution of pension assets – such as the creation of external funds to meet liabilities – instead of growth in them.
Regarding demand for the third-pillar version of Riester, only 15% of the 30m people eligible for it had taken it up as of the end of 2004. Insurers have, however, reported more robust demand for the pension since the beginning of 2005 when the AEG law simplified it.
According to Rürup, the bigger problem lies with demand for Riester’s DC plan in the private sector. “The latest statistic is that 16m employees (out of 30) have access to the scheme. The trouble is no one knows how many have actually participated,” he said, adding that participation rates were probably lowest among those most in need of the plan: lower-salaried workers.
Rürup feels that what is needed is a semi-mandatory DC scheme, where the onus would be on the employer and not, as now, on the employee to have it set up. The employee could then decide to opt out of the scheme.
Angela Merkel has ruled out making corporate pension saving mandatory. But Rürup notes that she may have to change her mind if the government’s planned review of Riester in 2008 finds that demand for second and third pillar pensions remains weak. “This was one of the requirements of the reforms, namely that if the voluntary approach didn’t work, a mandatory one would have to be introduced from 2009.”
The professor also expects that while the CDU/CSU left it out of its election manifesto, it will go ahead with a plan hatched some time ago to gradually raise the retirement age for employees to 67 after 2010.
Not all German pension experts agree with Rürup that as demand for second-pillar pensions has, even with Riester, remained weak, something must be done. One prominent one is Klaus Stiefermann, managing director of the German occupational pensions association aba.
According to Stiefermann, a new statistic indicating that 60% of employees in the private and public sector have access to a corporate pension means that “the spread of the second-pillar is happening at a faster rate in Germany than in did in the US during the 1980s.”
As a result, he sees no need for a CDU/CSU-led government to make pensions saving of any kind mandatory from 2009. He warns that if it were done, it would limit employees’ flexibility in structuring their own retirement savings plan and increase cost and hassle for employers.
“The government would have to ask itself the following question: Is it really a good idea to introduce the measure when our goal is to deregulate and reduce non-wage labour costs in order to make German industry more competitive?” observes Stiefermann.
Still, Stiefermann does think the next government can do more to boost the second-pillar version of Riester, including, above all, extending its exemption from social taxes beyond 2008. Currently, the exemption covers 4% of an employee’s monthly salary and, up to a certain limit, any top-off provided by the employer.
Yet even if the exemption were maintained, industry players like James Dilworth, head of Goldman Sachs Asset Management in Germany, do not believe that the tax incentives will be enough to spark a boom in pensions (see article page 16).
Rürup disagrees, noting that government support of second- and third-pillar pensions was never this generous. “An employee currently has the choice of taking up both Riester pensions. He can also decide to participate in the new Rürup-Rente, so the tax incentives really do add up,” he said.
Part of the AEG law that took effect at the start of the year, the Rürup-Rente is a supplemental private pension targeted mainly at people who are not covered by the state pension scheme, such as the self-employed. Demand for the tax-privileged pension has so far been tepid.
But life insurers in Germany say it has good market potential in the long-term, provided that the product is made more simple and people become more familiar with it. They note that this is exactly what has happened with the third pillar version of Riester.
It seems therefore that whatever pensions boom emerges under the next German government, it will not be on all fronts. Thanks to their dominance of the pensions market, insurance giants like Allianz and AMB Generali will be the ones to mostly profit from any growth in assets. Indeed, Allianz has made big headlines by predicting that Europe’s market for second- and third pillar pensions will more than double to €16.4trn by 2015, adding that a good portion of that growth will be in Germany.
On the other hand, asset managers that are not hooked up to insurers will see their business grow amid the need among German companies to diversify their portfolios and to set up external funds for their pensions liabilities.
To meet the latter need, companies have gained a less-expensive alterative contractual trust agreements (CTAs) with the Pensionsfonds, Germany’s answer to the Anglo-Saxon pension fund. That’s because the government, in implementing the EU pension fund directive last summer, greatly reduced the capital required for the transfer of on-balance sheet pension liabilities to Pensionsfonds. Experts say that while big, publicly-traded companies will continue to prefer CTAs, Pensionsfonds are an attractive prospect for small- to medium size enterprises (SMEs), which make up almost all of corporate Germany.
So as the new “grand coalition” between the CDU/CSU and SPD installs itself for the next four years, the hope is simply that it will continue the good work of the former in shoring up the state pension and boosting its supplements.

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