By Ilonka Oudenampsen
Many Germans are clueless about the build-up of their pension, a new study by Fidelity International has shown. The investment company said that despite all the initiatives to improve people’s pensions knowledge, most employees neither know how high their pension will be nor are they familiar with the three pillar pension system of state pension, corporate pension and private pension.
German employees overestimate the value of their retirement income, especially with regards to the part coming from corporate pensions. More than half (60%) have never heard of the three pillar model, while 70% of those who said they had, could not distinguish correctly between them.
According to the German Institute for Pensions (DIA), 88% of the aggregated retirement income of current pensioners comes from the state pension, while the income out of corporate and private pensions is 4% and 5% respectively. However, in the Netherlands for instance, the retirement income is much more evenly divided over the three pillars: 58% of the aggregated retirement income comes out of the state pension, 29% out of corporate pensions and 12% out of private pensions.
“Previous pensions campaigns have clearly not reached the Germans. Almost 90% still depend on the state pension, but due to demographic changes, the prosperity of today’s pensioners is no longer guaranteed for the future,” said Christian Wrede, managing director Central Europe and country head Germany at Fidelity International. “The majority is nowhere close to a good and viable pension mix of all three pillars. The Germans still lack the necessary knowledge. For a sustainable pension provision in Germany we need a change in the way we educate people.”
Moreover, there is also a huge gap between Germans’ expectation of the height of their retirement income and how much they will actually be receiving. Fidelity’s research showed that 71% of respondents have only a slight or no idea of the height of their pension. 81% expect a pension of 60% or more of their net earnings, while over 40% expect 80% to 100% of their net earnings. However, at retirement Germans only reach 56% of their final salary. Since the state pension is declining, the corporate and private pensions need to be strengthened in order to avoid a pension gap of 44%, Fidelity said.
Despite the annual pension information letter, 62% of respondents have a slight or no idea how high their state pension will be. Many believe they will get more than they will actually receive, although the expectations of younger employees are more realistic. The effort of educating the workforce seems to improve awareness about the pensions gap among younger workers. However, this does not mean that they save more for their private and corporate pension. 31% of respondents has no private pensions, especially the young workers.
Wrede said: “Transparency is key. If people do not understand their pension gap and possible solutions we seriously compromise our social system. Thus pension funds, the government, employers, trade unions and the financial community need to work together. Sweden is an important pioneer – they have established transparency by introducing a kind of bank statement for pensions. People can register and receive an annual statement of their estimated pensions coming out of the three pillars. Such an approach would be a good starting point for a turnaround in Germany.
“Corporate pension schemes with the possibility for deferred compensation are one of the most effective ways and need to gain higher importance in Germany. Instead of the current four percent corporate pension schemes are contributing to the overall pension income, a level of 25 to 30 percent should be achieved. In the Netherlands, a third of the pension income comes from corporate pension schemes. To achieve a comparable level, incentive schemes for deferred compensation need to be implemented.
The study questioned 1000 employees in between 18 and 55 in Germany between 2 March and 4 April 2011.