After the Riester debacle, an attractive fund must finally be found

Klaus Müller is a member of the board of directors of the Federation of German Consumer Organizations (vzbv)

There is no doubt that old-age insurance in Germany is on crutches. Although Germany is a wealthy country, new pensioners in the western federal states received an average gross pension of just 1140 euros in 2019. New retirees even only 728 euros.

If you deduct taxes and the contributions to health and long-term care insurance that are still due, there is hardly anything left for many. No wonder that the Federation of Industrialized Countries, the OECD, describes the federal government’s pension policy as “completely inadequate” and has been calling for fundamental reforms for years.

The voters, too, want the republic to finally make progress on pensions. Although the issue was not a major issue in this election campaign, old-age insurance is high on people’s list of priorities in surveys. The traffic light has a great opportunity here – all the more disappointing what the SPD, Greens and FDP have agreed so far. In the exploratory paper there are too many test orders instead of a clear new beginning.

Sweden shows how to empower savers

The statutory pension insurance should also invest in shares in the future – a paradigm shift. The grant, however, should only amount to ten billion euros. The statutory pension level is to be “stabilized” at 48 percent. That sounds good, but it is often not a lot either. It doesn’t mean that everyone gets almost half of what they last earned. The 48 percent relate to the income of all years of employment – if you have worked for 45 years. In other words, people have to put a lot of extra money into old age if they are to have enough in old age. And so we come to private old-age provision.

The Schröder government introduced the Riester pension more than twenty years ago. Schröder left. Riester stayed. That was fatal for consumers. The state has subsidized the Riester contracts with around 50 billion euros since 2002 in the form of allowances or tax relief.

However, consumers have hardly benefited from this. Many products are too expensive and inefficient. In a typical Riester insurance policy, according to the Finanzwende citizens’ movement, 24 percent of the payments are spent on fees and administrative costs. On the other hand, the finance and insurance industry benefited, into whose pockets a large part of the billions in funding flowed. It is not without reason that almost half of the pension savers with Riester products have now closed their contracts or pay in so little that they do not receive the full state allowance.

Replace the expensive commission-based system with a standard model

In their election manifestos, all parties that are now negotiating the coalition have announced that private pension provision will be reorganized. All three suggestions from red, green and yellow provide starting points for replacing the previous commission-based system with a new standard product.

In future, a publicly organized pension fund could be used to invest in equities at low cost, broadly diversified and with strong returns. Countries like Sweden and Great Britain are successful role models for this form of private old-age provision. You have long shown that such a model works for savers.

For Germany, the public fund should be designed in such a way that it serves the needs of savers one hundred percent. The investment would be advertised. Active sales are not necessary thanks to automatic savings through the employer. Anyone who does not want to participate can object by means of an opt-out rule. Since the investment is long-term, expensive guarantees can be avoided. This could save the immense costs that exist today in private old-age provision and reduce returns for consumers.

This would finally offer a private pension from which people really benefit. It must be clear that existing Riester contracts are protected and that there should be an option to switch to the new fund.

The concepts for the restart are in place. Not only with the international role models, but also with consumer advocates and the three parties who want to govern together in the future. It is all the more disappointing that the exploratory paper of October 15 stipulated only one audit mandate for the reform of private old-age provision. The new coalition is thus following in the footsteps of the previous government, which announced such a reform but never tackled it.

The SPD, Greens and FDP should therefore remember their own campaign promises and use the commonalities of their own concepts for a real reform of private pension provision. The aim must be for consumers to receive an uncomplicated and reliable offer for private old-age provision as quickly as possible, with which they can earn a profitable supplementary pension. Instead of just checking, it has to be: do it.