In this second article from our roundtable involving some of Germany’s largest asset managers and the funds trade body BVI, senior executives discuss the deficiencies in the national pension scheme.
Participants:
- Dirk Degenhardt, CEO, Deka Wealth Management (DWM)
- Hans Joachim Reinke, CEO, Union Investment
- Dr Matthias Liermann, global head of product management and chief country officer, Germany, DWS
- Ingo Mainert, chief investment officer multi-asset Europe, Allianz Global Investors
- Thomas Richter, CEO, BVI
*Note: This article was published before the announcement of a draft law on pensions in Germany. Read here.
Germany’s pension system is a complex structure consisting of three pillars aimed at securing retirement income for its citizens. The first pillar is pay-as-you-go, meaning current workers’ contributions are used to pay current retirees.
As in many countries, this system faces significant challenges due to an aging population and a shrinking workforce, leading to concerns about its long-term sustainability.
The second pillar – Betriebliche Altersversorgung – involves occupational pension schemes offered by employers. The second pillar is seen as a crucial supplement to the first pillar but remains underutilised, with only around 6% of retirement income currently coming from company pension schemes, said Thomas Richter, the chief executive officer of the BVI.
The third pillar consists of private pension plans, including the Riester and Rürup pensions. These are voluntary and incentivised by government subsidies or tax breaks. The third pillar provides individuals with an opportunity to save independently for their retirement, offering flexibility in terms of investment options.
“Only around 6% of retirement income comes from company pension schemes in Germany. That is really puny and far too little for a heavily industrialised country like Germany.”
Thomas Richter, CEO, BVI
Asset managers in Germany play a critical role in managing funds that support both the second and third pillars of the pension system. Dirk Degenhardt, the chief executive of Deka Wealth Management (DVM), highlighted that German asset managers are already strongly positioned, managing over €1.3 trillion AuM for pension funds, retirement funds and insurance companies.
The asset management industry manages 3 million Riester-investment- contracts. Moreover, there are 10 million Riester-insurance-contracts, where fund-based investments often play an important role, too. In addition, there are more than 20 million “normal” funds saving plans that serve as retirement provisions but have not yet been designated as such.
The panel was in broad agreement that German policymakers should encourage earlier savings into pensions and taking advantage of government support, such as the Riester subsidy, to close their pension gap.
“Far too little for an industrialised country”
Despite the strengths of the German pension system, several challenges persist. One significant issue is the low uptake of occupational pension schemes, which, as Thomas Richter of the BVI noted, contributes only a small fraction to retirement income in Germany.
“Only around 6% of retirement income comes from company pension schemes in Germany. That is really puny and far too little for a heavily industrialised country like Germany.”
He said the German asset management industry managed some €4,300 billion in assets, making it the largest fund market in Europe and much of this is from some form of retirement provision, either from pension schemes or insurance companies.
Part of the problem is that tax incentives have been given to life insurance funds and not other forms of funds, although this is being reformed. This skewed savings into life insurance funds to the detriment of pensions savings.
He suggested that German policymakers put too much emphasis on “wealth creation” rather then pensions savings and also that insurers had managed to scare politicians with dubious mortality tables that show income from retirement annuity provision running out before a person might be expected to die. This had gained the insurance industry support from politicians.
BVI figures show that of some €2,400 billion of investments through insurance companies for pension provision, only 34% of that is in investment funds.
Recent reforms and discussions aim to address these issues. Hans Joachim Reinke of Union Investment pointed out the need for systematic reforms in statutory pension insurance, suggesting that adjustments to both contributions and benefits are inevitable. The speaker also emphasised the need to address four critical areas: discouraging early retirement, encouraging longer working lives, increasing female participation in full-time work, and addressing the role of immigration in the labour market.
One of the most significant reforms in discussion is the potential shift away from the traditional life insurance model for retirement savings. As Thomas Richter highlighted, the focus is moving towards allowing fund-based savings plans to receive tax subsidies, even without the guarantees and annuities that are traditionally a hallmark of life insurance products. This represents a paradigm shift, opening up new opportunities for asset managers to offer competitive, return-oriented products that can better meet the needs of modern retirees.
Another critical area of focus is the need for more flexible pension products. Dirk Degenhardt of Deka mentioned the results of the focus group on pension provision, which aimed to make pension products more adaptable, particularly within the subsidised Riester contract framework. By waiving guarantees, investors can pursue more return-oriented investments, potentially enhancing their retirement outcomes.
However, as Thomas Richter and Dr.Matthias Liermann pointed out, there is still a long way to go in making occupational pensions more attractive and portable. In today’s dynamic job market, where young professionals are unlikely to remain with a single employer for their entire careers, the portability of pension benefits is crucial. The lack of portability in Germany’s company pension schemes, as compared to the US 401(k) model, is a significant barrier to their wider adoption.
The future of pension reforms
Looking ahead, the future of Germany’s pension system will likely involve a greater emphasis on capital-funded pensions, with asset managers playing a more significant role. As Dr. Matthias Liermann at DWS suggested, the debate around generational capital and the potential for asset managers to manage these funds is gaining traction. However, political challenges remain, particularly with the current coalition government’s divisions on this issue.
Ingo Mainert of Allianz GI highlighted the historical reluctance of German policymakers to embrace risk capital and stocks as a significant component of pension planning. However, there is optimism that this attitude is beginning to change, with discussions around generational capital indicating a shift towards more investment-based pension solutions. With an eye on Germany’s demographic challenges this might actually come late and may not suffice yet – but better late than never, he emphasized.
With an eye on Germany’s demographic challenges this might actually come late and may not suffice yet – but better late than never, he said.
*This article was produced by Nick Fitzpatrick, editor, Funds Europe, and Markus Hill, a Frankfurt-based freelance journalist.
