Sunday, November 28th, 2021
New traffic light old-age provision
What the introduction of the share pension means
From Laura Eßlinger
With the new traffic light government comes the share-financed pension scheme. The coalition partners invented the term “share pension” for this. What will this change for citizens? And what are the consequences for the capital market?
Everything new for the pension? Not quite. At least in the short term, the traffic light promotes continuity rather than a U-turn. The future traffic light government does not want to shake several parameters for the time being: The retirement age is to continue to be raised gradually to 67 years, but not beyond.
The pension level remains at 48 percent and the contribution rates that employees have to wiggle off for the pension are capped. They can increase to a maximum of 20 percent in the next four years. It is currently 18.6 percent. The new government wants to reduce pension increases in 2022 via the so-called catch-up factor. On the whole, little will change in the short and medium term for the around 20 million retirees and also for employees.
But: It looks very different for future generations of pensions. The coalitionists want to change the pension system in such a way that the statutory pension will no longer be fully pay-as-you-go. So far, the young have paid the old people’s pensions with their contributions. Because there are more and more old and fewer young people due to demographic change, this system is in danger of collapse.
Fund for everyone
According to the will of the new government, the old-age provision should therefore be partially funded in the future. The FDP invented the pithy term “share pension” for this. With the favorite project of the Liberals, future retirees are to be introduced to the capital market. According to the coalition agreement, a “permanent fund” is planned for this, which “is to be professionally managed by an independent public body and invest globally”.
This fund should be “permanently property-protected” for the citizens, which means nothing other than that the state has no access to the contributions they have made.
The introduction of the share annuity has had major consequences for the capital and stock markets. So far, only just under 18 percent of Germans have invested in stocks. That will change automatically with the funded old-age provision. Andreas Hackethal, Professor of Finance at Frankfurt’s Goethe University, thinks the move makes sense. On the one hand, this would enable returns to be made even during the current phase of low interest rates, says Hackethal. The prerequisite for this is, of course, that the fund invests successfully.
Are markets becoming more democratic?
On the other hand, German equities are likely to be more positive overall. “There will be a tipping point at which the cliché ‘stocks are only for experts and the rich’ is reversed,” believes Hackethal. “Once the hurdle is broken, more people will generally invest in stocks.” That would also support the plans of the Ampel coalition for private and company pension schemes. Those who make operational provisions should in future be able to achieve higher returns through more investment opportunities. Private provision is to be “fundamentally” reformed, through a publicly administered fund with a cheap offer.
All of this, in turn, could downright democratize the markets – at least to a certain extent. “Employees then participate in the productive capital of the economy and benefit directly from global economic growth,” says Hackethal. For the capital market, on the other hand, entry into the share rent would also mean that the fund would make the state a major investor with a lot of power.
The big question is how exactly the stock pension will be structured. There is nothing about this in the coalition agreement. The concept of the FDP stipulates that all insured persons pay two percent of their gross income into the fund with the participation of the employer. It would therefore also be possible that more can be paid in voluntarily or invested in other investment products via an opt-out option.
Personalize the system
Financial expert Hackethal advocates individual options for share pensions. “If you don’t want to invest in certain industries and want to put your money into green systems, for example, you should be allowed to.” Hackethal believes that the proportion of shares should also be variable. Theoretically, the share pension should be worthwhile for everyone, including people shortly before retirement. “But it usually takes ten years for a compound interest effect,” says Hackethal. “There is no such thing as a quick high pension.”
As much as the FDP will advertise the chances of the share pension in the coming weeks, a residual risk will remain, says Hackethal, even if the fund is likely to be strictly supervised. “The rule is: return for risk. There is no guarantee of contributions.”
The article first appeared at Capital.de.