Private retirement planning: BVI presents five-point plan together with insurance and building societies
The extremely low interest rates and a stagnating uptake are making a reform of state-sponsored private retirement plans a matter of urgent necessity. Today, in Berlin, the associations of insurers, investment companies and building societies (the German Bausparkassen), authorised to conduct home savings business) have presented a five-point plan aimed at radically simplifying the system of Riester pension schemes. The aim is to deliver better returns and to lower costs for savers, thus encouraging a stronger uptake. Among the reforms that the associations recommend are
- designing standard products free of complicated choices that are easy to give advice about and can therefore be offered at lower cost;
- an attractive and transparent form of state funding that can be intuitively understood by everyone: each euro paid in by the saver is topped up by at least 50 cents;
- state-sponsored private retirement plans should be available to everyone – including the self-employed;
- a relaxation of the guarantee of total gross contributions in order to boost return opportunities for savers;
- a general simplification of the procedure for granting bonuses (check before paying) in order to reduce the number of bonuses clawed back each year (currently some 800,000) by more than 90 percent.
The associations are asking the German government to call an early meeting with providers, as agreed in the coalition contract of the governing parties in order to realise its aim of strengthening private retirement planning by the first half of 2020. The proposed reform initiatives offer considerable cost-cutting potential. Close cooperation between providers and the government is vital in order to achieve this.
The associations see a thoroughgoing development of the current system as being a substantially more convincing reform approach than switching to a different system, with all the risks that this involves.
Suggestions, such as a virtually compulsory Deutschland-Rente, as proposed by the Government of the Federal State of Hesse, or the ‘extra pension’ advocated by the Federation of German Consumer Organisations (vzbv), place a burden on employers.
Moreover, they ignore the fact that 70 percent of employees already have retirement schemes in the form of Riester contracts (insurance, investment funds, Wohn-Riester or bank savings plans) or company pension schemes, and thus rely on the sustainability of these retirement planning systems. This figure does not include any other private retirement products.
A radical change to the system, more or less compulsory, without minimum protection for investors, would produce considerable insecurity among the population.
The five-point plan of the associations in detail:
- Design standard products
Standardised Riester products should supplement what has now become a very diverse product landscape by adding simple basic products. The standard products should be reduced to the core characteristics of a supplementary retirement plan. This makes it easier to give advice about them and to digitise them. There should be no more complicated choices for customers making it necessary to give intensive advice.
- Make state funding more transparent
Even today each euro paid in is topped up by a bonus of 50 cents. This funding rate should be guaranteed for all customers. The present funding system, whose effects are largely opaque to the general public, would be easier to understand and discernibly very attractive at one glance. Basic allowances and child allowances would remain available to low-income groups.
- Enlarge the group of those eligible for state funding
The complex demarcation of the group eligible for state funding should be abolished entirely and replaced by the general eligibility of all German taxpayers with full tax liability. This particularly includes the self-employed.
- Relax the guarantee of contributions
The present commitment of a 100 percent guarantee of gross contributions hampers savers' chances of making lucrative investments. It is therefore necessary to adapt the statutory guarantee to the current situation on the capital markets, without sacrificing customers' need for security. Standard products, in particular, must still guarantee customers a sufficient measure of security, even where guarantees are relaxed.
- Make the bonus procedure automatic
Instead of savers having to apply for a bonus, providers should automatically notify the Central Allowance Authority for State Subsidized Pensions (Zentrale Zulagenstelle für Altersvermögen – ZfA) of the total contributions paid within three months before the end of the contribution year. Before paying out the bonus, the ZfA authority should make a final check to verify whether the conditions for receiving a bonus have been fulfilled. This adjustment will make it possible to reduce the number of bonuses clawed back, from the current figure of around 800,000 a year, thus saving substantial administrative costs.