Deutsches Aktieninstitut welcomes the draft bill for state-subsidized private retirement savings accounts

The Federal Ministry of Finance has presented a draft bill to reform private retirement savings, which seeks to make private retirement savings more attractive. The bill primarily introduces a state-subsidized retirement savings account that offers people in Germany the opportunity to use equities, equity funds or exchange-traded funds (ETFs) in their private retirement savings. This will enable them to better prepare for their retirement. Deutsches Aktieninstitut is in favour of a swift implementation of the proposals. 

"The draft bill is an important step towards more attractive private retirement provision with equities. Many countries have successfully used retirement investment accounts with a high equity component for years. In Australia, for example, retirement investment accounts with an equity component of around 50 percent generated returns of 7.1 percent per year on average from 2004 to 2023,” emphasizes Henriette Peucker, Executive Director of Deutsches Aktieninstitut.

Our study, which Deutsches Aktieninstitut published together with the Deutsche WertpapierService Bank in May, also shows the extent to which other countries use equities in retirement provisions via securities accounts. What is common practice in other countries has also been included in the draft law.

Eliminating Guarantees and Enhancing the Payout Plan

This includes the option contained in the draft law to choose either a guaranteed product or a guarantee-free retirement account. As a rule, premium guarantees or minimum interest rates are financed with a high proportion of fixed-interest securities such as government bonds. However, more fixed-interest securities also mean fewer equity investments and thus lower returns. Given that long-term, broadly diversified equity investment typically generate an average of six to nine percent in annual returns, guarantees are unnecessary for long investment periods such as in retirement provision. 

The draft law also provides for flexible rules for a disbursement plan. This approach allows for only the monthly requirements to be withdrawn from the disbursement plan, while the remaining retirement assets remain invested in equities. Furthermore, there is no requirement for an expensive annuity obligation. 

Increase tax-free allowances further

Deutsches Aktieninstitut welcomes the Federal Ministry of Finance's plan to increase state incentives, making retirement investment accounts more attractive for tax purposes. Currently, a maximum of €2,100 can be invested annually in a tax-privileged manner in a Riester pension. This amount, unchanged since 2007, is set to increase to €3,000 per year according to the draft law, with an additional increase to €3,500 planned from 2030. While this is a step in the right direction, it does not fully compensate for inflation. Other countries are much more generous; for example, the deductible amount in the US is $6,500 per year, equivalent to €6,000. Germany could learn from this example.

“Private retirement planning with a retirement savings account needs flexibility and simple rules. Easy-to-understand and standardized investment products are important so that broader segments of the population in Germany can take advantage of the opportunities offered by equity-oriented retirement savings accounts. We hope that the proposals on the table will be implemented quickly,” says Peucker.