The German Finance Ministry, under Minister Lars Klingbeil (SPD), is proposing a significant overhaul of the nation’s private pension system, aiming to broaden investment options for savers and simplify the process of accessing state subsidies. The plan, detailed in a draft law obtained by “Handelsblatt”, represents a shift from previous initiatives spearheaded by former Finance Minister Christian Lindner (FDP) and reflects ongoing tensions within the governing “traffic light” coalition.
At the core of the proposed reform is the introduction of what’s being termed an “age-oriented investment account”. This new offering would diverge from the current system, primarily geared towards guaranteed-return products like Riester contracts. While those options will remain available, the new account structure would allow for investments without mandated guarantees, potentially leading to higher returns but also carrying increased risk for the investor. The government aims to position this as a particularly accessible “standard product” geared towards smaller investors.
A key criticism leveled against the existing system is the significant impact guarantees have on investment returns. Financial institutions are currently obligated to assure investors they will receive at least their initial contributions, a stipulation which effectively limits potential growth. This new framework seeks to remove that barrier, allowing capital to be deployed in a more dynamic fashion.
To ensure affordability and prevent exploitation, the draft law includes a provision for a cost cap. The proposed investment account will be offered, at least in its standard form, with “effective costs” capped at a maximum of 1.5 percent. However, the government is keen to reassure those preferring a more conservative approach by preserving the option of “guarantee products” with two levels of assurance – 80 percent and 100 percent of initial contributions.
The mechanics of state subsidies are also being streamlined. The proposed legislation outlines a tiered subsidy system. A basic allowance of 30 cents per euro invested will be provided, up to a yearly limit of €1,200. For contributions exceeding that amount, the subsidy rate is reduced to 20 cents per euro, capped at a total investment of €1,800 annually. A child benefit of 25 cents per euro invested, capped at €300 per child, is also included in the revised proposal.
While proponents tout the reform as a step towards a more flexible and investor-friendly pension system, critics within the FDP and financial sector express concerns about the potential impact on risk aversion among savers and the feasibility of attracting providers to offer the new “standard product” within the imposed cost limitations. The true test of the proposal will hinge on its ability to balance enhanced investment choice with security and accessibility for a broad spectrum of German citizens.
