Growing life expectancy, falling premium income: the heated discussion on the future of the public pension system is by no means unique to Germany. All the big industrialised countries are struggling with a growing shortfall in their pension provision. According to a recent study by the G30 Group, an international body of experts from central banks, academia and finance, this shortfall will amount to a staggering USD 15.8 trillion in the 21 biggest economies in the world by 2050.
Yet while Germany offers numerous, often state-subsidised, options to supplement the state pension through private provisions, similar schemes are rather thin on the ground in many other EU countries. This prompted the EU Parliament to launch a European pension concept in April: the pan-European Personal Pension Product (PEPP).
The PEPP sets an EU-wide framework within which to offer private pension products in addition to the state, occupational and private pension systems of the individual Member States. The European Insurance and Occupational Pensions Authority (EIOPA) is to issue directives to establish a legal framework for the PEPP by the summer and the first PEPP products should then be ready to come onto the market by 2021.
Valid across Europe, authorised at national level
The European pension represents a new type of pension product, the first of its kind to apply across Europe. According to the Federal Financial Supervisory Authority (BaFin), it will particularly benefit people in countries with inadequate pension systems or who have worked in different EU countries.
One key advantage of the PEPP pensions is mobility. As they are governed by a standard legal framework, insured persons can easily take their PEPP with them when moving to another EU country. Providers also benefit, as they have no cross-border complications to contend with when selling PEPP products in other Member States. The national supervisory authorities – BaFin in Germany – authorise the different policies, and the subsidies are also taken care of at a national level for political reasons.
That poses a major challenge as it is difficult to harmonise the different pension systems and tax regimes of the individual EU Member States. Germany only wants to grant tax relief on PEPP products if they fulfil the same criteria as the Riester pension.
Conversely, if a German in Austria, Italy or the Netherlands, for example, wants to keep paying into their private pension plan taken out in Germany, they are liable for tax on their contributions. “It isn’t easy to take private pension insurance to another country,” says Michaela Willert, a pension expert at the German Insurance Association (GDV). “And the new European pension will not solve the problem.”
Risk hedging is another challenge. Interested parties have a choice of different risk variants. According to EIOPA, the basic model should provide a capital guarantee so the client will at least get their contributions back minus costs on maturity. This security is in the interest of the consumer, however EIOPA still needs to determine how other providers than insurers are to provide that guarantee.
Calling something a pension does not necessarily make it a pension
Many financial services providers are allowed to offer the European pension, subject to authorisation by the national supervisory authority. This has been met by scepticism in some quarters: “Asset managers and hedge funds are eligible PEPP product distributors. That will make the pension market a pawn of the capital markets,” warns Martin Schirdewan, financial-policy spokesman of the left-wing party Die Linke in the European Parliament. In the absence of any clear guidance as to how the capital guarantee can be ensured, the paid-in contributions cannot be completely secure.
In addition, while the EU Commission has strongly regulated the savings phase, it has not stipulated that savers must invariably be able to draw benefits for the rest of their life. “In Germany, people understand a pension as a lifelong annuity, however PEPP opens the door to labelling pure savings products as a ‘pension,’” argues Heike Bähner, Management Board member of Volkswohl Bund Versicherungen. “We consider it problematic that non-insurers can provide fixed-duration payment plans and call them pensions.” Studies have shown that many Germans underestimate their life expectancy. That means they could choose a product offering a shorter payment period at more attractive conditions over the “much more valuable, lifelong pension,” says Bähner. In this scenario, people who live longer than they thought they would will eventually lose one of their income sources and may have to rely on social welfare to make ends meet.
Better prospects in central and eastern Europe
The planned cost cap is another sticking point. The EU has already stipulated that the costs of the Basic PEPP may not exceed one percent of the accumulated contributions. “That is mainly to limit costs for the consumer and introduce a certain degree of comparability,” says a spokesman for the Federal Financial Supervisory Authority. Consumer advisors consider one percent too high while insurers find it unrealistically low. Providers incur major costs, especially at the outset, when establishing a new insurance product, especially if it is different to well-known products. “You have to set up the product, draw up a contract and provide the obligatory advice. A one percent cost ceiling fails to cover those expenses for the provider,” argues GDV expert Willert.
The European pension may in any case prove a hard sell in Germany. There is already an extensive offering of private and occupational pension products, there are over 16 million Riester contracts and still more people have private pension insurance. The prospects are better in other EU Member States, such as the Czech Republic, Hungary or Slovakia, says Willert.
Nonetheless, people who often move across national borders for work should take a good look at the new products. Given the growing problems facing state pensions, the merits of private pension provision are indisputable.
This text is a translation from the magazine "positions" of the GDV