Equity returns needed to boost pension payouts
A retirement pension until death is no longer a given in subsidised pension schemes. Instead, Federal Finance Minister Christian Lindner (FDP) wants to add a payout plan until the age of 85 as a possible option.
The variant has some supporters, but it goes to the core of retirement provision: a pension should cover a person's needs until death. The public has an interest in ensuring that old people are adequately provided for, in order to prevent poverty in old age, and later burdens for the welfare state. Indeed using this argument, the general public subsidises private pension provision for individuals. The risk of the capital stock being used up before death should therefore be insured against. Many people have long been living well beyond the age of 85.
Not discarding guarantees completely
Those in favour of payout plans without guarantees note the low returns on investments if life annuities are inflexible. The objection is justified. However, it is possible to combine a fixed base with a flexible portion in a life annuity, in order to provide scope for an opportunity-orientated investment. The draft law includes this option for good reason. No one has to completely throw the guaranteed part of their pension overboard.
Another objection is that, under normal circumstances, only a few investors might be affected by a depleted capital stock before the time of death. But should the Federal Republic of Germany rely on this? Capital markets can also collapse over years or even decades. Even then, very old people want to be provided for.
There is plenty of praise for freedom of choice, under which every person should decide on their own investments. The argument is convincing as long as the person concerned bears the risk alone. In state-subsidised pension schemes, however, the general public also pays its share. The public is entitled to – and should – impose conditions.
The German Insurance Association (GDV) has called on the government to improve its third pillar reform draft, and has some solid arguments. However, the industry shows little vigour when it comes to the risk of excessive costs. A cost cap for subsidised pension products? That should also be discussed!
