Germany’s state-supported private pension system is entering a new phase on January 1, as the unpopular Riester pension becomes an outdated model. Its successor does not yet have an established name, but experts broadly regard it as more transparent, cost-conscious and flexible.
Unlike the previous system, guarantees that reduced potential returns will no longer be mandatory. Consumers will also be able to choose whether to draw down their accumulated capital or convert it into a lifelong annuity, rather than being required to select a contract with regular pension payments.
The reform will not eliminate the role of financial distributors. That continuity may help avoid a complete break with the existing system, but it also raises concerns about the information gap between advisers and customers. The original introduction of Riester and Rürup pensions was accompanied by aggressive sales practices and contracts that were not always suitable for consumers.
Competition in the subsidized pension market has weakened over the past decade. International providers withdrew during the low-interest-rate period, followed by several German companies, leaving major firms such as Union Investment, Generali and Allianz among the remaining prominent participants. The reform is expected to expand the range of products, but that could also make decisions more difficult for savers.
Consumers are therefore advised to examine fees, conditions and sales incentives carefully. Brokers, online investment platforms and financial distribution networks all operate with their own commercial interests. A product presented as a standard pension account is not necessarily inferior simply because it is cheaper, while a more complex product is not automatically better.
There is also no need to make a rushed decision. The reform replaces a system whose guarantees have generally been viewed as unattractive under current capital-market conditions. Consumers do not need to sign up quickly for an old Riester contract before the changeover.
Low-income savers require particular caution. Under the existing system, they could benefit from relatively high subsidy rates, whereas the new model uses a standardized form of support. For some of these consumers, keeping an existing Riester arrangement may be more advantageous, even if the contracts have disadvantages.
The reform also revives the debate over guarantees. The requirement to repay at least every euro contributed was a major reason the Riester model failed to generate stronger returns, according to the source material. Partial guarantees of 60 or 80 percent could provide a different balance between security and investment opportunities, but consumers must understand the risks involved.
The experience of Sweden is cited as a reminder that successful pension reform also depends on greater trust in capital markets and stronger participation in equities and productive capital.
Sources: FAZ.