Berlin Private old-age provision is to be reformed and made more attractive. The experts employed by the federal government propose a restructuring of the Riester pension and the introduction of new subsidized investment opportunities. On the other hand, the idea of a publicly managed fund that offers a simple and inexpensive standard pension product is not being pursued any further.
Private old-age provision should be “fundamentally” reformed, said State Secretary for Finance Florian Toncar (FDP), who heads the “private old-age provision focus group”, summarizing the results. The 132-page final report, which is now being presented to the federal cabinet, is intended to form the basis for the reform planned by the traffic light coalition. “I wish that we can complete the legislative process in 2024,” said Toncar.
The private Riester pension introduced with the pension reform of 2001 has had a problem with acceptance for some time. Although the number of Riester contracts initially rose sharply after the introduction, it has stagnated at around 16 million for years. Recently it has even dropped slightly.
The Ministry of Labor estimates that a good fifth of the contracts have been suspended, i.e. no more contributions are being paid there. Low returns, high sales and administration costs and a confusing variety of products reduce the attractiveness.
However, because the traffic light coalition basically wants to stick to the triad of statutory pensions, company and private pension schemes, they set up a focus group to develop ideas for reform.
Experts decide against public funds – Greens criticize the vote
The traffic light was also looking for external expertise because the ideas of the SPD, Greens and FDP differed widely when it came to private provision. While the FDP primarily promoted higher shares in pension products, the SPD and the Greens brought up a publicly managed fund. According to the ideas of the Greens, everyone who does not expressly object should automatically make private provisions, a so-called deselection solution, also known as an opt-out declaration.
Read more about retirement provision
However, according to the final report, the fund did not find a majority in the focus group after “controversial discussion”. Twelve members voted against pursuing the idea, including employers and unions. Five voted in favour, two abstained.
The Federal Ministry of Economics, led by the Greens, expressed regret that the fund did not find a majority. The market for private old-age provision products is characterized by information asymmetries, high distribution costs, excessive asset management costs and complexity,” writes the ministry in a dissenting opinion.
“A large number of citizens will therefore retire with too little income.” A publicly managed fund could have helped here.
Reform of the Riester pension: More standardization required
According to the recommendations of the focus group, the classic Riester pension should be retained, albeit under a new name. The aim of a fundamental reform must be more standardization. In order to enable higher returns, investment products with a risk of loss should also be permitted, so that pension savers may not even get the paid-in contributions out.
The grand coalition in 2018 already took a similar path with regard to company pension schemes. As part of the social partner model, employers are no longer liable for a certain amount of future company pension payments, so that investments in more risky forms of investment such as shares are also possible.
In the case of private provision, however, there should be provision products graded according to risk, in which, for example, at least 80 percent of the contributions paid in are guaranteed.
Different views on a citizen fund.
(Photo: IMAGO/Future Image)
There should also be more flexibility in the retirement phase in the future: so far, Riester contracts have provided for an even monthly pension payment. In the future, there could also be products that pay out more at the beginning of retirement.
In order to create more transparency about the large number of private pension products, the experts propose a comparison portal that should make the acquisition and administration costs of the pension products comparable, for example. Switching between providers should also be made easier in order to ensure more competition.
The hope: more competition will lower costs. Consumer protection groups, on the other hand, had called for more stringent political interventions, for example to cover the high commission costs.
New investment instrument: ETF as subsidized provision
As a new element in the toolbox, the focus group proposes a so-called old-age provision depot. This is offered by banks or insurance companies as a kind of cover. Retirement savers can then invest in funds or ETFs, for example, and then receive state support, as with the classic Riester pension.
“In principle, therefore, an eligible private retirement savings account with a strong equity orientation without guarantee requirements makes sense in the future,” says the report. This would primarily be aimed at younger savers who still have time until they retire and are therefore better able to cope with fluctuations in value.
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The aim of the model is to ensure that the funded depot “actually only serves to provide for old age”. Such a new product could “intensify the competition between different providers and therefore contribute to falling costs and higher returns”.
The new rules could also be adopted for existing contracts – but only if both sides agree. Otherwise, nothing will change for existing contracts, Toncar emphasized.
In order to promote private provision, there are tax incentives in addition to allowances: up to 2100 euros can be claimed annually as special expenses in the tax. This amount has not been increased since Riester was introduced. The Commission recommends “increasing the amount and making it dynamic in the future”.
However, this recommendation is subject to budgetary reservations. This means that the government will still calculate the costs during implementation – and see what they can afford given the tight budget situation.
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