The Swedish model is insufficient when it comes to old-age provision in Germany 

The report is a good starting point for the much-needed debate on a crucial future topic: The evolution of old-age provision. Based on (a) the proposals on further development of statutory pensions set out in the coalition agreement, and (b) the test mandate for private pension provision (pAV), the Scientific Advisory Council of the Federal Ministry of Finance has outlined core elements of a potential evolution of funded pensions. The report by the renowned panel of experts considers different forms of design and addresses the following important aspects: 

  • Organization (government offerings versus private-sector solutions)
  • Capital investment strategy 
  • The importance as well as the costs of premium guarantees in private pension plans
  • The question of voluntary versus obligatory participation (and whether it should be limited to certain target groups)
  • Pay-out versus annuitization of benefits

The paper also discusses whether and in what form public debt financing would be justifiable when setting up funded systems. 

Does the report lay out a completely new approach? Essentially, the authors appear to favor a mandatory supplementary system consisting of a state and private "standard offering" without committing themselves to a specific model. Some commentators argue that the equity pension – the so-called Swedish model – would be the correct solution. Yet such a model might fall short. To understand why, we must consider various aspects of old-age provision that would not be adequately reflected in a transition to this model:

As positive as the focus on equities is, efficient and targeted wealth accumulation should not only be about equities;  it should be about broad investment in real assets and alternative investments, such as real estate, infrastructure investments, or non-exchange-traded equity or financing. This would also be in line with a genuine diversification approach or the investment principles of successful institutional investors. Just look at what’s happening in other countries; endowment funds at major U.S. universities invested a significant portion of their assets in alternative asset classes very early on. This is now standard practice among large pension funds in the Anglo-Saxon region, Northern Europe and Switzerland. The performance of alternative asset classes is far less dependent on movements in equity and bond markets and is therefore less volatile. 
Particularly in the case of lifelong pension benefits – as called for by the Scientific Council – equalization both in the collective and over time plays an important role. Traditionally, this equalization is implemented by life insurance companies, but in theory, it can be done in a number of ways. An interesting model is the pure defined contribution plan in occupational pension schemes, developed as part of the "Betriebsrentenstärkungsgesetz" (Occupational Pension Strengthening Act). In this example, collective systems are created through governance of the collective bargaining parties; this allows security buffers to be established, and the resulting balance can also be used for the pension phase.
The reciprocal effects of integrating a new, mandatory element into the three-pillar system are barely touched upon in the report, although these will play a very important role in its success or failure. There are also distributional issues at play, since the capital used will either be lacking in other pillars or will – at least indirectly – create crowding-out effects. For example, one question that arises is whether or not employees would be better off contributing their own funds to an employer-sponsored occupational pension.

Isn’t it therefore essential that we attribute more discussion to the question of how retirement provision can be linked to other pressing issues? Issues such as the transformation of the economy in Germany, Europe and worldwide, and the financing of business start-ups? Investments in infrastructure, for example, could be an excellent link; due to the long-term investment horizon in retirement provision, the achievement of higher returns by entering into long-term capital commitments (and the associated illiquidity premiums) appears particularly promising. This is demonstrated by innovative examples at the intersection of asset management and life insurance. 

Surprisingly, some argue that mandatory standard products would promote the investment and equity culture in Germany and contribute to financial education and wealth accumulation among the population. However, strengthening financial education through a compulsory system does not appear to be the best route. There are more effective approaches to tackling financial education and investment promotion in Germany. One example is the promotion of employee share ownership in companies, which builds up assets in the long term and strengthens employee loyalty. 

Based on the report and commentary, we should contrast and discuss other aspects of reform in the context of the debate around the Swedish model:

  • Strengthening of funding and reduction of guarantees in both pillars of supplementary pension provision, i.e. in both occupational and private pension plans – this would allow more freedom and broader inclusion of alternatives in the capital investment
  • Streamlining of Riester regulations and opening them up to new and more competitive forms of investment 
  • Promotion of financial education and consistent digitization of processes and systems (including a digital infrastructure for the dissemination of old-age provision to better target young people) 
  • Addressing how the necessary investments in the upcoming transformation process can be linked to retirement provision

This latter is of the utmost importance. It would be worthwhile to hold a broad debate on the topic, with a view to implementing future-oriented measures that allow for the targeted development of old-age provision, while also linking to the major future issues of our time.

Andreas Wimmer is a Member of the Board of Allianz SE. His CV is available on our Board of Management page
The Allianz Group is one of the world's leading insurers and asset managers with around 125 million* private and corporate customers in nearly 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 746 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage about 1.8 trillion euros** of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we are among the leaders in the insurance industry in the Dow Jones Sustainability Index. In 2023, over 157,000 employees achieved total business volume of 161.7 billion euros and an operating profit of 14.7 billion euros for the group.
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