Frankfurt Riester savers have to brace themselves for sobering numbers these days. Because the providers of the more than three million subsidized old-age provision contracts with funds send out their annual reports on their development. They will reflect the past weak year on the stock and bond markets.
The losses incurred reveal a problem in the construction of the subsidy pension: Because of the capital guarantee at the beginning of the payout phase, the funds have to hold a large proportion of bonds in order to build up a buffer with stable income. Only then can providers rely on higher-yielding stocks, which also harbor higher risks of loss.
Many Germans who make provisions with a Riester contract are now expecting a lower retirement income for 2022 because of the poor balance sheet. But fee consultants, consumer advocates and scientists usually advise them against canceling their Riester pensions in annoyance. The losses could still be compensated. In the medium term, the industry is hoping for a fundamental reform of the Riester pension by politicians.
“With the losses on the stock and bond markets, all Riester pensions have inevitably lost value,” says the cooperative fund house Union Investment somewhat tight-lipped.
The market leader for Fonds-Riester has 1.8 million contracts in its portfolio. The Deutsche Bank fund subsidiary DWS is also preparing its agents in a statement that “the majority of DWS Riester contracts in the past year have had a rather negative performance”. 600,000 Germans have concluded a Riester contract via DWS.
Contracts with a high proportion of funds with long-term bonds suffered the most: they recorded a minus of almost 50 percent. “This applies to contracts that have been concluded in recent years,” explains Frank Breiting, head of old-age provision at DWS.
In the phase of negative interest rates until the beginning of 2022, the providers would not have been able to build up an equity quota. For this reason, hardly any returns were achieved with younger contracts, even in good stock years beforehand, and the massive price losses had a full impact in 2022.
A bad balance sheet for the year is a snapshot
However, the modest balance sheet for the year is initially nothing more than a snapshot. The Riester contracts run for decades and can make up for lost years.
Depending on the age of the depositor and the term of the contract, new contributions are now invested more heavily in shares. Because the bond interest that can now be achieved again forms the described buffer for possible price losses. In this way, the required capital guarantee is achieved and there is more scope for share purchases.
According to the Union, almost all customers with longer remaining terms have a significantly better chance of long-term participation in shares than a year ago. As early as 2022, the providers increased the share shares in the Fonds-Riester contracts again: at the end of 2022, half of the Union depots had a share share of 65 percent, a year earlier it was only 50 percent.
With termination of the Riester contract, consumers lose their previous allowances and tax benefits. Marlene Haupt, Professor of Social Economics and Social Policy at the Ravensburg-Weingarten University of Applied Sciences
DWS also reports that in some cases it increased the proportion of shares in its 2022 Riester contracts. The rate is now between eleven and 75 percent, an increase of a good 30 to 176 percent.
However, people who are about to retire are hit harder than those at the beginning of the payment phase. However, these contracts should have built up a buffer beforehand and, because of the forthcoming payment phase, should rather contain bonds with a shorter remaining term, says Stefan Schiesser from Frankfurter Honorarberatung. They would have lost less.
Under no circumstances do Riester pensioners enter the payout phase with a loss. In the worst case, the capital guarantee applies. The saver is sure to get the contributions paid in and the state allowances back.
This also applies to the largest group of Riester pensions, the ten million subsidized insurance companies. Here, too, the providers cannot invest with greater risk and therefore with higher returns because of the capital guarantee.
For the life insurers themselves, the rise in interest rates is ambiguous: since they invested customer deposits primarily in low-interest government bonds for years, there are now hidden burdens on their balance sheets.
The bonds have lost value due to the rise in interest rates. As long as the companies hold the paper until maturity, this is not a problem. Only if they sell them in advance do the losses make an impact.
When making new investments, life insurers are even gradually benefiting from rising interest rates. Holders of classic Riester policies with a guaranteed interest rate, which were mainly offered in the early years, are gradually benefiting from this. Current interest, which is made up of guaranteed interest and current surplus participation and which is credited to the insured each year, has recently increased again slightly for some life insurers.
In the case of Riester insurance companies that also invest in funds, the fund capital can temporarily fall below the contributions paid. But with these so-called unit-linked policies, often only a small part is invested in funds outside of the classic interest-bearing security assets. This stabilizes the assets, but limits the opportunities for returns.
800
Euro
someone who pays the maximum amount of 2100 euros annually into the Riester pension with tax class I will receive it back with the tax return.
This is one of the fundamental criticisms of the Riester pension. Not only is the concept too complicated and rigid. Above all, insurance companies are criticized as too expensive and too low-yield, because relatively little capital flows into investments with potential returns.
Because of the capital guarantee, this also applied to the fund contracts, which were actually more promising, during the phase of low interest rates. Many Riester savers are therefore primarily based on the quite lavish allowances or the tax advantage.
Terminating the contract should be the last option
Despite the frustrating year on the stock market, experts warn savers against knee-jerk reactions: terminating a Riester contract should be the last option. Marlene Haupt, Professor of Social Economics and Social Policy at Ravensburg-Weingarten University, points out that consumers would lose their previous allowances and tax benefits.
They also did not get back the acquisition and distribution costs they had already paid. It is better to shut down a contract, i.e. not to save on it any further.
The honorary adviser Schiesser also sees it this way: For the majority of savers, a Riester contract pays off simply because of the tax savings. Anyone who pays in the maximum amount of 2100 euros per year with tax class I will receive around 800 euros back with their tax return. Families with three or four children also received four-digit allowances.
However, a portfolio of shares and ETFs offers a more profitable old-age provision than a Riester contract, he adds. A mix of different systems is therefore the most sensible.
What needs to be done depends on the individual contract and the type of saver, says Niels Nauhauser, head of the finance department at the consumer advice center in Baden-Württemberg. Risk-taking investors with a longer investment horizon could cancel their contracts and invest the money in ETFs, he says.
The federal government wants to discuss further steps to reform private old-age provision. Federal Ministry of Finance
On the other hand, he advises security-oriented investors who receive high allowances to continue saving. For others, it could be worthwhile to pay the savings contributions into the statutory pension insurance.
New Riester contracts are no longer available from all providers. LVM and Stuttgarter Versicherung as well as DWS and Deka have withdrawn. As a result of low interest rates, the capital guarantee prevents sensible investment, they complain.
According to the industry association GDV, this is one reason why new business with Riester insurance companies fell by 60 percent in 2022. According to the Federal Ministry of Labor and Social Affairs, there were still 16 million Riester contracts across all product groups at the end of the third quarter of 2022 – the promotional pension thus missed its goal of nationwide private old-age provision.
Reform of the Riester pension is faltering
A reform of private old-age provision has been part of the coalition agreements of the changing federal governments for years. A focus group set up at the Federal Ministry of Finance with representatives of the product providers, consumer advocates and scientists is now examining options by the summer: a streamlined Riester pension, for example with a lower capital guarantee, alternatives for subsidized private savings with higher return opportunities or a publicly controlled, low-cost fund.
Also read: Insurers want a fresh start – away from the unpopular Riester pension
Professor Haupt, who is a member of the focus group, is in favor of the latter option: “A publicly responsible fund for private old-age provision, similar to that in Sweden as part of the statutory pension, would also enable low-income earners in particular to be flexible for old age save without having to think too much about it.”
Based on the results of the focus group, the Federal Government then wants to “advise further steps to reform private old-age provision”, according to the Federal Ministry of Finance. That sounds like another test of patience for Riester savers.
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