In the context of the geostrategic disputes between the USA and China, the desire for European political and economic sovereignty is currently on everyone’s lips. But this also requires a competitive European financial system – a factor that unfortunately receives far less attention.
The fact that neither the banking nor the capital markets union is found in the exploratory paper by the SPD, the Greens and the FDP, which now serves as the basis for the coalition talks, was rightly criticized. On the other hand, the entry into the capital-covered statutory pension scheme, which the partners in a traffic light coalition have promised, is very welcome.
A well-functioning capital market not only needs clear rules, transparent securities issuers and knowledgeable service providers, but also long-term investors. A role traditionally played by insurance companies in Germany before this was made difficult for them by regulatory changes.
According to the exploratory paper, ten billion euros are to be added to the statutory pension scheme in the coming year, which can then be invested in the capital markets. A good and important step for the pensioners of tomorrow, but also for the German and European economy.
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And a step that is long overdue: as early as the late 1990s, there were the first initiatives for stronger funded old-age provision. The SPD, CDU / CSU and FDP had discussed corresponding plans and in February 1998 also introduced motions for resolutions in the German Bundestag, which then did not result in laws.
Studies by Deutsche Bank, but also by Goldman Sachs, with titles such as “The Pension Time Bomb” made it clear that there was an urgent need for action. The demographic development already spoke a clear language. In the meantime, the persistent phase of low interest rates has exacerbated the challenge of saving for adequate retirement provisions.
The traffic light parties have now agreed in the exploratory talks to strengthen the statutory pension. The aim is to secure the minimum pension level of 48 percent. In addition, there should be no cuts in pensions and no increase in the statutory retirement age.
Without reform, federal subsidies would have to increase enormously
If one wanted to keep the promise without reform, then the subsidies from the federal budget into the pension fund would have to increase from the current 28 percent, i.e. more than 100 billion euros per year, to 54 percent in 2045. This is the conclusion of the scientific advisory board at the Federal Ministry of Economics in its most recent report.
These figures make it clear that the ten billion euros for a funded component that is to accompany the statutory pension insurance in 2022 can actually only be a first step. Experts assume that an amount in the three-digit billion range would be necessary. With its income, the pension could be effectively supported.
Against this background, the traffic light parties should question again in their coalition talks whether the funded component should remain a voluntary offer to the contributors as currently planned – or whether the successful Swedish model should not be followed consistently in view of the pressure to act and time pressure. There, for example, 2.5 percentage points of the statutory pension contribution rate are compulsorily invested in capital market investments.
Furthermore, the traffic light parties should consider whether they would like to take up another aspect from the cross-party and cross-faction discussion at the end of the 1990s. The motions for resolutions cited above not only spoke in favor of more fully funded old-age provision, but also wanted to tackle another problem: A small part of the funds for old-age provision should be invested in young companies, i.e. start-ups.
Extra returns for retirement
It is about the question of how, on the one hand, one can generate additional returns for good and secure old-age provision in a risk-conscious manner and, at the same time, support and keep innovative, promising companies in their own market. It is still a fact today that in Germany it is not a major problem to win so-called seed investors for the first financing round of a good business model. However, it becomes problematic if growth is to be supported with larger sums after the first phase.
Even in 2021, Germany does not have the market structures to even come close to lifting a large growth financing round like the latest from N26, in which the Berlin financial company raised more than $ 900 million on its own.
While German venture capital companies usually have an average fund size in the three-digit million range, a single venture capital company in the USA can fall back on a financing power of several billion. If companies then follow the golden rule of never investing more than ten percent of fund assets in a company, the German problem becomes completely obvious.
Innovative German companies that want to get started after the first seed phase and are looking for capital for the subsequent phases are therefore primarily dependent on foreign donors. The fact is that, according to the Federal Association of German Equity Participation Companies (BVK), 51 percent of the equity capital invested in Germany comes from pension funds, which in turn are primarily based outside of Germany. Only six percent of the financing comes from family offices, i.e. asset management of entrepreneurial families, or private individuals.
US pension funds have been investing in equity capital for decades
And we also see that it is not uncommon for innovation and jobs to follow money. The Technical University of Munich found out in 2019 that more than half of all successful start-ups with foreign donors left their home country. The discussion about poaching attempts by German biotech companies at the height of the pandemic is still fondly remembered.
For a stable, efficient and prosperous Europe, we need innovative companies that are successful, create jobs and thus shape the future. With the planned entry into funded old-age provision, the old idea that has been successfully implemented by pension funds in the USA for decades could be taken up again – with good, sustainable returns. US pension funds invest an average of nine percent of their assets in equity capital.
If we follow the US example with the ten billion euros that are to be added to the pension fund in the concept of the traffic light partner, we could raise around 50 percent of the risk capital that was invested in German growth companies in 2020 after the start-up phase.
That would be an important step for more independence and an important sign for Germany as a location for innovation – for more Biontechs or SAPs. And at the same time it would be a good investment for the retirees of tomorrow.
The author: Paul Achleitner is chairman of the supervisory board of Deutsche Bank, venture capital investor and was CFO of Allianz for twelve years.
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