The German Council of Economic Experts, a body advising on economy policy, has initiated discussions about a public fund investing mainly in equities with an ‘opt out’ option to replace the Riester-Rente in the third-pillar pension system.

Martin Werding, member of the Council of Economic Experts, told IPE that its proposal was for a “publicly managed, heavily equity-based fund as a standard/default product in the third-pillar [pension system]”.

Savers are automatically assigned to the public fund if they don’t make use of the opt-out option, but also if they don’t take their own investment decisions, he added.

“At the same time, you can, of course, actively choose it or invest your funds with private providers,” Werding said.

The Council members have reignited this debate after publishing an op-ed in the weekly Die Zeit newspaper, which dubbed the proposal “a sovereign wealth fund for Germany”.

In the article, the experts discuss current and past reforms for capital-funded pension provisions, to relive the German pension system from an increasing demographic pressure.

The system of capital-funded pensions “must become more binding and simpler”, generating higher returns and lower costs, they wrote.

The funds for the third-pillar public fund should come from members’ savings, for example 4% of gross earned income, as previously the case with the Riester-Rente pensions, Werding explained.

The preferred form of investment for the fund is equities, diversifying the portfolio globally, possibly combined with a life cycle model, meaning an increasing share of fixed-income investments in individual accounts over time.

The state-run fund would compete with private providers to improve transparency of products and cost cutting, the experts wrote in the op-ed, naming as examples AP7 Såfa in Sweden and NEST in the UK.

Criticism to upcoming changes

The proposal for a third-pillar public equity fund comes as the majority of stakeholders in the Fokusgruppe Altersvorsorge, a platform set up to recommend reforms for the third-pillar pension system in Germany, rejected the establishment of such a fund with the opt-out option, potentially dealing a blow to the government’s plans.

The government coalition of Social Democrats (SPD), Greens and Liberals FDP had agreed to assess the possibility of establishing a public fund with an effective and cost-effective offer and opt-out option, but without referring explicitly to equity investments, in an effort to radically reform the third pillar also through products with higher returns than Riester-Rente.

For the Council of Economic Experts the recommendations of the Fokusgruppe Altersvorsorge have not given “a clear perspective” on the future role of capital-funded pensions, but have instead lined up the interests of the stakeholders.

Meanwhile, the Finance Ministry is still working to set up an equity component in the first-pillar pension system labelled Generationenkapital, with an initial capital stock of €10bn for investments, to stabilise in the long run, pension contributions and mitigate public funding paid for the first pillar.

The experts consider mixing the capital-funded pension mechanism in the first pillar to be “non-transparent”, especially in the form of Generationenkapital currently being discussed.

Werding said that the ‘Generationekapital’ solution for the first-pillar penison sytem that the Ministry of Finance is considering, has several weaknesses; the planned capital volume of €10bn is “far too small” and credit financing limits achievable returns, especially in times of increasing interest rates.

He added that doubts arise about whether the Generationelkapital construct will stay stable in the future because of the type of financing, and the fact that income is not booked on individual accounts.

“The funds could be withdrawn or the proceeds could be opportunistically distributed far too quickly,” he said.

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