Germany: a new approach
Written by Dr Klaus Mössle
Germany is taking much needed steps to strengthen its retirement provision, explains Dr. Klaus Mössle
The Germans are stumped when it comes to pension provision. In a nutshell, they expect too much and do too little. The majority of the population is miles away from an effective and most importantly robust mix of pension provision made up of all three pillars of the German system (statutory, private and company). They don’t have any transparency about the gap in their pension planning and they lack the knowledge to close the gap. This is the sobering result of a representative survey by Fidelity International among 1,000 German workers.
The Germans not only have the wrong mix of pension provision, they also fundamentally overestimate the level of their future pension. 71% of the people surveyed have no idea of the likely level of their overall retirement pension income. Four out of five Germans are expecting more than 60% of their current income, almost every second person anticipates as much as 80 to 100%.
In fact, only 56% of a person’s final income is realistic, as indicated by the Fidelity Real Index as early as 2007. Since the state pension is declining, there is a threat of a pension gap of 44% if private and company provision is not bolstered significantly. And the trend is increasing.
This pension scenario entails significant consequences. Company pension provision offers the fastest, most efficient and sustainable way round this pension scenario. Instead of 4% (source: Deutsches Institut für Altersvorsorge), 25 to 30% of total pension should come from company pension provision. The percentage in the Netherlands is already one third. Company pension provision is a highly efficient way of saving for a pension because investors are encouraged to make regular payments, normally remain invested when the markets are volatile and increase their contri- butions when they have scope to do this. This was revealed by an analysis of 11 million pension accounts carried out by Fidelity in the USA.
The chemicals sector in Germany is setting a good example. The collective agreement entitled “TV Demo” created an obligation for employers to pay a certain “demographic contribution” into a pension plan or a worktime account. The agreement allows the employers to make their contribution subject to an equal contribution by the employees. In spite of relatively high numbers of participants in corporate pension plans in the chemicals sector (49%), the metalworking industry (50%), or the financial sector (73%), the overall coverage ratio especially in the so-called German “Mittelstand” appears far too low. Instead, an obligation agreed upon by the social partners along the lines of the model in the chemicals sector at company level could lead to a rapid and sustainable strengthening of company pension provision and hence retirement provision.
The results of the latest survey provide significant evidence for this. This is because only 10% of workers stated that they had proactively opted against a company pension plan. This indicates that only a few employees are actually likely to make use of the opt-out clause. When an initiative of this nature is made involving a commitment by employees, it is important that the worker representatives are integrated within the process. The unions, in particular, can constitute a strong mediator for issues relating to company pension provision. Union members are already making more use of company pension plans than non-members: 46% of active members plus 45% of former members. This represents a share of more than 10% greater than non-members (34%). Unions play a key role. They are able to explain the importance of company pensions and outline the benefits of company pension plans by using their direct line of communication to employees. Belonging to a union also exerts a major effect on how company pension planning is perceived.
Almost 80% of union members stated that company pension plans were an important element of retirement provision. It has emerged that union members and employees in large companies are the best informed, alongside employees in the financial sector and branches of industry with strong union representation.
Apart from the intensity of communication by employers, the incentives for pension commitment through salary conversion also need to be enhanced. After all, employees need to be convinced that they will be rewarded for cutting back on consumption before they will even start to invest. The scheme must make it worthwhile to invest money for their pension today rather than purchasing a
new television. In order for this to be convincing, the money must be invested in financial concepts that lead to the expectation of a good yield after all the costs have been deducted. The plan also needs to be flexible and tailored to individual requirements. Company pension provision should not simply preserve the capital invested, it also needs to generate robust profits. The benefits need to provide security when people change their employer. The systems must be structured so that it is easier to change employers than is the case today: 25% of employees have decided against investing in a company pension plan because they cannot take their savings with them when they change jobs.
Another 25% stated that they had not opted for a company pension plan because they had no access to the contributions they had paid in before retirement.
These are two of the background reasons that we need to eliminate – without completely revolutionising the entire system. Effective employer matching is another factor for motivating employees. The responses of the employees – 71% value the additional payment made by the employer – show that initiatives of this nature have significant chances of success.
More overall transparency is required for retirement provision. This is because anyone who doesn’t know about their pension gap will not make adequate provision. The results of the survey demonstrate this clearly. This is why a form of account statement is required which lists all the elements of retirement provision and highlights the pension gap. This form of total overview is provided in Sweden with all the individual elements of the various pillars. Information is requested from all the different players: pension insurers, employers and the financial sector.
A debate is still required on the extent to which this kind of account statement will be voluntary or obligatory. We are prepared to cooperate with all the players in the implementation of this type of account statement. Since some aspects such as costs and yields are not presented in a manner that is always completely transparent and comparable, statutory and uniform minimum information requirements and formats could be defined by law. This kind of total overview would not only make the pension gap and the necessity for provision more transparent, it would also allow the yields of the individual pillars and products to be compared.
In Germany, we need to significantly strengthen company pension provision, generate more transparency about the pension gap and develop a new approach to explaining the situation and communicating knowledge in order to ensure future-proof retirement provision. All the players need to be involved in this process.
This is the most efficient way of closing the pension gap and maintaining the stability of our health and welfare system over the long-term.
Evolution rather than revolution is needed – strategically and fast.
Written by Dr. Klaus Mössle, managing director and head of institutional business at Fidelity International, Germany