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Global Investing: A slow road to German pension reform
When Germany's ruling Social
Democrat coalition introduced radical pension reforms at the beginning of
this year, they were expected to herald a bonanza for the financial
services industry as Germans rushed to save for their old age.
Financial analysts held out the
prospect of a German savings market that would grow by a mouth-watering
€20bn-€40bn ($19bn-$38bn) over the next five years.
But, six months on, barely 6 per
cent of the 35m Germans entitled to take out a private pension product
have done so. Only 1.9m policies have been sold, though the government
says several million more people are set to sign up for corporate schemes.
Banks, insurers and other
providers have been putting a brave face on the figures. But their initial
euphoria is rapidly giving way to disenchantment.
Allianz, the giant insurer, and
Deutsche Bank are among Germany's elite financial institutions that have
publicly criticised the reforms.
The common view is that the
"Riester" pension products - named after Walter Riester, the
labour minister who piloted the reforms through parliament - are too
"The law is so perfect that
no one really understands it," says one Frankfurt-based banker.
"It is a typically over-engineered German product."
To add to the gloom, consumer
groups have strongly advised the public - faced with as many as 3,500
different products - to take their time before taking the plunge. That
advice is echoed by the government's own promotional brochures.
There is little opposition to the
principle of reform. It has been hailed as an epoch-making first step. It
is the first time in postwar Germany that part of the responsibility for
pension provision has been shifted from the state back to the individual.
But the Riester reforms have been seen by many as a cautious stop-gap
solution, aimed at bolstering a creaking pay-as-you-earn retirement system
that is unable to bear the strain of a rapidly greying population.
Like most other European
countries, Germany funds retirement benefits by taxing current workers.
But, with people living longer and having fewer children, the
all-important ratio of workers to dependents is calculated to double over
the next 48 years. By 2050, there will be two workers for every senior
citizen compared with four workers at the moment.
In such circumstances, the level
of taxation required to sustain such a system would be unaffordable, say
pension experts. The only solution is to encourage individuals to save for
their retirement in individual or group plans by offering subsidies or tax
The Riester reforms set out to do
just that. Starting this year, Germans have been able to put up to 4 per
cent of their income into state-subsidised retirement schemes, either
individual Riester products or occupational plans offered by their
But the financial incentives, say
critics, have not been significant enough.
"It will take more than this
to break five decades of reliance on social security," says a
Frankfurt fund manager.
Already, there is talk of making
the schemes compulsory if the voluntary system fails to attract a
sufficient number of savers. Last week, Udo Behrenwaldt, head of Deutsche
Asset Management's European operation, said: "If behaviour can't be
changed, then maybe, to make the whole system work, one would need to make
it compulsory." Joachim Faber, Allianz's head of fund management, has
made similar comments.
This would be politically
sensitive. But there may be no alternative. Recent polls show that more
than 70 per cent of Germans are not interested in pension plans.
Dirk Fach, of PwC Consulting,
says the main problem is that there are lots of rival equity-based
products that provide better investment returns. A Riester product comes
with a "money back" insurance-style guarantee that, by costing
more, has a negative impact on the returns to the saver.
But he is optimistic the market
will develop. A PwC survey of providers shows that most expect corporate
or occupational schemes to account for two-thirds of the pension market
over time. The government estimates that 60m workers could join such
Mr Fach says: "Providers are
beginning to focus on corporate schemes. If they can't reach the public
directly [through Riester products], they will try it through
Under the pension legislation,
companies have to offer occupational schemes to employees. At present,
most small- and medium-sized businesses - the backbone of the German
economy - do not offer membership of a company pension scheme.
The potential is there - and the
pressure on individuals to save for retirement will only get higher. The
government is already gradually reducing pension benefits, and it is
widely expected to cut them further as budgetary difficulties mount.
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