Private pension provision must reach all working people. This requires a standard private pension product that reliably secures the standard of living of all citizens in old age. This is provided by a publicly managed, equity-based fund with broad diversification and an opt-out option.
The standard product is an individual capital-funded pension scheme. Every working person pays part of their income into the fund, unless they object, and thus builds up a pension for themselves. As they get older, the equity portfolio is gradually reorganised into safe investments. The automatic inclusion in a standard product reduces the social selection of private pension provision. The opt-out option allows people to decide in favour of other options. Accordingly, the standard product offered by the state must stand up to private-sector competition. Citizens continue to have the freedom to provide for their old age as they see fit.2
The simulation calculations by Bucher-Koenen et al. (2019) show that the amounts paid into a standard funded pension product designed in this way could increase approximately fivefold over a term of 45 years.3 The calculations also take into account fluctuations on the capital markets and possible losses as a result of financial crises.
Closing the pension gap with an opt-out
With this standard product, all working people build up their own private pension provision unless they actively object (opt-out). The experience of the last 20 years with the Riester pension has shown that a voluntary solution does not sufficiently encourage citizens to make additional private provision for old age.4 An obligation would be inappropriate paternalism that would restrict citizens' freedom of choice too much.
A standard solution that applies automatically, but which can be objected to, is the best solution from a behavioural economics perspective.5,6 It also leads to private provision for people who are unable or unwilling to deal with this issue. At the same time, it gives everyone the opportunity to make a different decision if they think they would be better off making provision in another way. This means that the standard state product is not a monopoly, but remains in competition with other providers. This model is already being used successfully in many other countries, for example in occupational pension schemes in the UK or the USA.7,8
Employees who are not subject to social security contributions, such as the self-employed who often have gaps in their old-age provision9 , should be given access to this standard product, at least as part of a voluntary opt-in model.10 This structure would give all citizens more incentives to make additional private provision for old age. No one is forgotten.
Consciously address target groups and minimise the additional burden
The standard product must be attractive and, in particular, meet the expectations of target groups that have no or insufficient private provision. At present, it is mainly people with low incomes, low levels of education, young and female employees who do not make sufficient private provision for old age (‘selection effects’).11 Instead of further increasing the already high savings rate in Germany,12 the new standard product of funded pension provision should specifically address these people to build up a high-yield pension provision and at the same time impose as little additional financial burden as possible.13,14,15
This can be achieved, for example, by reducing acquisition and administration costs16 , passive investment management17 and particularly high subsidy rates for the target groups mentioned through more comprehensible forms of allowance, a simplified child allowance, an expansion of the career starter bonus and an adjustment of the maximum amount18. For people who lack any financial leeway for their own pension provision in old age, protection through statutory pension insurance remains crucial.
A secure, binding and high-yield investment
A decisive quality feature of a high-quality, private, funded pension scheme is the expected return.19 The capital investment of the new standard product must be secure, binding and high-yielding. Therefore, the investment focus should be on equities with broad risk diversification and the individual risk should be automatically reduced with increasing age.20 Short-term capital market risks are offset by long investment periods.
In principle, the new standard product should be designed to be as flexible as possible. This means that consumers are given the freedom to choose the amount of their private pension provision and can both increase and decrease the savings amount.21 Automatic contribution increases could further increase the savings behaviour of citizens and increase the expected return.22
Easing guarantee requirements
Capital market guarantees23 should make private pension provision more attractive. However, these do not necessarily have the desired effect of fully preserving value and can even have the opposite effect. Instead of ‘securing’ the expected return, it was almost impossible to generate attractive expected returns for policyholders during a long period of low interest rates. In order to increase the return opportunities of the capital market for security-oriented consumers 24 with a relatively small increase in risk, it makes sense to lower guarantees for the new standard product and to take additional educational measures.25,26
Uncomplicated and on an equal footing with private-sector products
The wealth of information and complexity of private-sector pension products lead to excessive demands and knowledge gaps in the population27 , especially among young people.28 In order to enable a conscious decision on the form and volume of pension provision, more and better planning offers, transparency and clarity about the expected return29 as well as an early focus on financial education30 are needed.
The new standard product for funded private pension provision must therefore be as simple, transparent and easy to explain as possible. An easy-to-understand product design with a simple funding framework31 in the face of private-sector competition gives citizens more security and at the same time the freedom to continue or change their pension provision.
Conclusion: A standard product of private funded pension provision for prosperity and fairness
Demographic change poses major challenges for statutory pension insurance. Private pension provision is therefore a central building block for securing prosperity in old age.
A new standard product for private pension provision for all employees subject to social insurance contributions provides a strong impetus to counteract the current lack of private provision and contribute to personal security in old age.
The opt-out option preserves individual freedom of choice and exposes the state product to market competition. It sustainably encourages people to adopt a simple standard solution for themselves or to make a different decision on their own initiative.
1 Around a third of employees subject to social insurance contributions do not make any additional provision for old age, i.e. they do not have any supplementary company or private funded pension provision in addition to the statutory pension insurance. The proportion of low-income earners, people without vocational qualifications and people with a migration background is above average. Cf. infas (2020), Verbreitung der Altersvorsorge 2019 (AV 2019) – Abschlussbericht, Forschungsbericht 565, im Auftrag des Bundesministeriums für Arbeit und Soziales, infas Institut für angewandte Sozialwissenschaft, P. 16.
2 In its report on the assessment of macroeconomic development, the German Council of Economic Experts recently spoke out in favor of such a standard product for funded pension provision, Cf. Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2023): Wachstumsschwäche überwinden – In die Zukunft investieren.
3 Tabea Bucher-Koenen, Jesper Riedler and Martin Weber (2019): Kapitalanlage eines staatlich organisierten Altersvorsorgefonds, ZEW, Gutachten für den Verbraucherzentrale Bundesverband (vzbv).
4 Johannes Geyer, Markus M. Grabka and Peter Haan (2021): 20 Jahre Riester-Rente – Private Altersvorsorge braucht einen Neustart; DIW Wochenbericht 40/2021; online at: https://www.diw.de/de/diw_01.c.826232.de/publikationen/wochenberichte/2021_40_1/20_jahre_riester-rente_____private_altersvorsorge_braucht_einen_neustart.html [last access: 03.04.2024].
5 Martin Werding, Veronika Püschel, Benedikt Runschke and Milena Schwarz (2024): Realitäten anerkennen, Rente zukunftsfähig gestalten, Wirtschaftsdienst 104 (2).
6 When designing the opt-out option of a standard private pension product, care must be taken to ensure that vulnerable groups of people with low incomes do not decide against additional pension provision. Cf. Bundesministerium für Arbeit und Soziales (2017): Altersvorsorge im internationalen Vergleich: Staatliche Produkte für die zusätzliche Altersvorsorge in Schweden und dem Vereinigten Königreich: P. 47; online at: https://www.bmas.de/SharedDocs/Downloads/DE/Publikationen/Forschungsberichte/fb494-altersvorsorge-im-internationalen-vergleich-schweden-uk.pdf?__blob=publicationFile&v=1 [last access: 08.04.2024].
7 Ibid.
8 Dominik H. Enste and Jennifer Potthoff with the assistance of Axel Börsch-Supan (2024): Förderung privater und betrieblicher Altersvorsorge: Steuerliche Anreize und Nudging im internationalen Vergleich. RHI-Studie No. 39; online at: https://www.romanherzoginstitut.de/publikationen/detail/foerderung-privater-und-betrieblicher-altersvorsorge.html [last access: 25.04.2024].
9 Organisation für wirtschaftliche Zusammenarbeit und Entwicklung (2019): Renten auf einen Blick 2019: Alterssicherung für Selbstständige in Deutschland lückenhaft; online at: https://www.oecd.org/berlin/presse/alterssicherung-fuer-selbststaendige-in-deutschland-lueckenhaft-27112019.html [last access: 24.04.2024]
10 Fokusgruppe private Altersvorsorge c/o Bundesministerium der Finanzen (2023): Abschlussbericht der Fokusgruppe private Altersvorsorge; online at: https://www.bundesfinanzministerium.de/Content/DE/Downloads/Broschueren_Bestellservice/abschlussbericht-fokusgruppe-private-altersvorsorge.html [last access: 08.04.2024].
11 Johannes Geyer, Markus M. Grabka and Peter Haan (2021): 20 Jahre Riester-Rente – Private Alter vorsorge braucht einen Neustart; DIW Wochenbericht 40/2021.
12 Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2023): Wachstumsschwäche überwinden – In die Zukunft investieren: 344.
13 Isaak, Niklas, Philipp Jäger and Robin Jessen (2021): Die Verteilung der Steuer- und Abgabenlast, Wirtschaftsdienst 101 (4).
14 Dorothea Mohn and Thomas Köster (2018): Ein neuer Start für die private Altersvorsorge – Ein Standardprodukt als Pfad für eine zukunftsfeste Rente; online at: https://www.kas.de/en/single-title/-/content/ein-neuer-start-fuer-die-private-zusatzvorsorge [last access: 05.04.2022].
15 Dominik H. Enste and Jennifer Potthoff with the assistance of Axel Börsch-Supan (2024): Förderung privater und betrieblicher Altersvorsorge: Steuerliche Anreize und Nudging im internationalen Vergleich. RHI-Studie No. 39.
16 Hessisches Ministerium der Finanzen u. a. (2017): Deutschland-Rente Konzeptpapier; online at: https://finanzen.hessen.de/Initiativen/Deutschland-Rente/Hessens-Konzept-der-Deutschland-Rente [last access 08.04.2024].
17 Passive investment management (i.e. the replication of existing indices, e.g. exchange-traded funds ETFs) offers a number of advantages on the cost side; Cf. Christian Hagist (2021): Mehr Kapitaldeckung wagen, aber wie? Drei Wege zur Reform der deutschen Altersvorsorge; Kurzexpertise für die Konrad-Adenauer-Stiftung: P. 7.
18 Fokusgruppe private Altersvorsorge c/o Bundesministerium der Finanzen (2023): Abschlussbericht der Fokusgruppe private Altersvorsorge.
19 Ibid.
20 A strong commitment to equities is particularly important at a young age in order to realize corresponding potential returns. The closer the expected retirement date approaches, the more the investor's assets should be reallocated to fixed-income securities and other, less volatile forms of investment; Cf. Marlene Haupt and Sebastian Kluth (2012): Das schwedische Beispiel der kapitalgedeckten Altersvorsorge: ein Vorbild für Deutschland? Vierteljahreshefte zur Wirtschaftsforschung, Vol. 81; online at: https://www.econstor.eu/handle/10419/99702 [last access: 15.04.2024].
21 Martin Werding, Veronika Püschel, Benedikt Runschke and Milena Schwarz (2024): Realitäten anerkennen, Rente zukunftsfähig gestalten, Wirtschaftsdienst 104 (2).
22 Dominik H. Enste and Jennifer Potthoff with the assistance of Axel Börsch-Supan (2024): Förderung privater und betrieblicher Altersvorsorge: Steuerliche Anreize und Nudging im internationalen Vergleich. RHI-Studie No. 39: P. 22.
23 “This guarantee requires that at least the contributions paid in from personal contributions and allowances are available at the time of pension payment.” Cf. Dominik H. Enste and Jennifer Potthoff with the assistance of Axel Börsch-Supan (2024): Förderung privater und betrieblicher Altersvorsorge: Steuerliche Anreize und Nudging im internationalen Vergleich. RHI-Studie No. 39: P. 18.
24 Signal Iduna (2019): Betriebsrente ohne Garantie: für Arbeitnehmer akzeptabel, wenn die Voraussetzungen stimmen; online at: https://www.mynewsdesk.com/de/signal-iduna/pressreleases/betriebsrente-ohne-garantie-fuer-arbeitnehmer-akzeptabel-wenn-die-voraussetzungen-stimmen-2854920 [last access: 08.04.2024].
25 Stefan Graf et al. (2021): Auswirkungen von Garantien auf inflationsbereinigte Chancen und Risiken langfristiger Sparprozesse: P. 6; online at: https://www.ifa-ulm.de/index.php?id=41&tx_ttnews%5Btt_news%5D=676&cHash=c92606da021350808ebf43d4154987f8v [last access: 08.04.2024].
26 Fokusgruppe private Altersvorsorge c/o Bundesministerium der Finanzen (2023): Abschlussbericht der Fokusgruppe private Altersvorsorge.
27 Press release from Deutsche Vermögensberatung dated June 28, 2021: Two thirds of Germans are overwhelmed by the information on private pension provision; online at: https://www.dvag.de/dvag/das-unternehmen/presse/pressemitteilungen/dvag-altersvorsorge.html [last access: 22.04.2024].
28 Klaus Hurrelmann et al. (2019): Jugend, Vorsorge, Finanzen – Wird das Vertrauen einer Generation verspielt? Metall-Rente Studie 2019; online at: https://www.metallrente.de/fileadmin/docs/Website/Chronik/MR_Jugendstudie_2019_Broschu__re.pdf [last access: 22.04.2024].
29 The Digital Pension Overview Act, which came into force in 2021, is a step in the right direction. The Swedish system of “orange envelopes” with information on future pension entitlements should serve as a model here. Cf. Dominik H. Enste and Jennifer Potthoff with the assistance of Axel Börsch-Supan (2024): Förderung privater und betrieblicher Altersvorsorge: Steuerliche Anreize und Nudging im internationalen Vergleich. RHI-Studie No. 39.
30 In schools or through private sector initiatives, for example the “Future Day of the Initiative for Economic Youth Education”; Cf. https://www.zukunftstag.org/ [last access: 22.04.2024].
31 Cf. Martin Werding, Veronika Püschel, Benedikt Runschke and Milena Schwarz (2024): Realitäten anerkennen, Rente zukunftsfähig gestalten, Wirtschaftsdienst 104 (2); Fokusgruppe private Altersvorsorge c/o Bundesministerium der Finanzen (2023): Abschlussbericht der Fokusgruppe private Altersvorsorge.
