Generationenkapital can strengthen pensions for the future

Federal Minister of Finance Christian Lindner and Federal Minister of Labor Hubertus Heil today presented the German government's new pension concept, Pension Package II. Part of the package is the Generationenkapital,  which takes advantage of the attractive opportunities offered by the capital markets and is intended to ensure the stability of pensions after 2025. Deutsches Aktieninstitut welcomes the associated relief for the federal budget and the assurance of affordable pension contributions.

In addition to pension contributions and subsidies from the federal budget, the Generationenkapital is a third, additional component for financing the statutory pension insurance. "With its introduction, the German government is moving towards the capital coverage of old-age provision that we have long called for and is taking advantage of the strong returns on equities," says Dr. Christine Bortenlänger, Chief Executive and Member of the Board of Deutsches Aktieninstitut. Equities have their strengths in long-term investment periods and are therefore predestined for old-age provision. A broadly diversified equity investment can generate long-term returns of around eight percent annually. "With the Generationenkapital we have a proposal on the table as to how shares can be used in the first pillar of old-age provision in Germany. We welcome the Foundation Generationenkapital provided for in the draft law, which must invest federal funds in a return-oriented and globally diversified manner.There is no way around shares," emphasizes Bortenlänger.

It is essential for success that a sufficiently large capital stock is built up. Otherwise the relief for the federal budget will not be noticeable."This means that the goal of building up assets of 200 billion euros by 2036 with annual contributions is only a start," Bortenlänger clarifies.

Financing intergenerational capital through contributions

The Generationenkapital must continue to grow after 2036 and cannot be financed in the medium term by government debt. As is already the rule in other countries, pension contributions must also be funded and become part of it. The so-called premium pension in Sweden is a successful model here. Since the end of the 1990s, employees in Sweden have been investing 2.5% of their wages in the capital market, largely in shares. One example of this success is the AP 7 Såfa fund, which is used by more than five million Swedes for their premium pension. With an equity share of around 90 percent of total assets, it has generated an annual return of almost ten percent over the past 20 years.

Strengthening the third pillar of private pension provision should not be forgotten

In addition to the first pillar, i.e. the state pension, the third pillar of old-age provision, private savings, is also crucial for citizens to be financially well positioned in retirement. The second pension package must therefore not be the only reform effort by the coalition. "We expect the German government to incorporate the results of the private pension focus group into a draft law that will provide further impetus for the use of equities in private pension provision. A core element should be an eligible retirement savings account, which can also be used to save for old age with shares," emphasizes Bortenlänger.